```

[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

 
        H.R. 1827, THE GOVERNMENT WASTE CORRECTIONS ACT OF 1999

=======================================================================

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
                      INFORMATION, AND TECHNOLOGY

                                 of the

                     COMMITTEE ON GOVERNMENT REFORM
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                                   ON

                               H.R. 1827

   TO IMPROVE THE ECONOMY AND EFFICIENCY OF GOVERNMENT OPERATIONS BY 
        REQUIRING THE USE OF RECOVERY AUDITS BY FEDERAL AGENCIES

                               __________

                             JUNE 29, 1999

                               __________

                           Serial No. 106-104

                               __________

       Printed for the use of the Committee on Government Reform

                              

  Available via the World Wide Web: http://www.gpo.gov/congress/house
                     http://www.house.gov/reform
                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
63-548 CC                    WASHINGTON : 2000

                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida                PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia            CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana           ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South     DENNIS J. KUCINICH, Ohio
    Carolina                         ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia                    DANNY K. DAVIS, Illinois
DAN MILLER, Florida                  JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
LEE TERRY, Nebraska                  THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois               HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California                             ------
PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont 
HELEN CHENOWETH, Idaho                   (Independent)
DAVID VITTER, Louisiana

                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
           David A. Kass, Deputy Counsel and Parliamentarian
                      Carla J. Martin, Chief Clerk
                 Phil Schiliro, Minority Staff Director

   Subcommittee on Government Management, Information, and Technology

                   STEPHEN HORN, California, Chairman
JUDY BIGGERT, Illinois               JIM TURNER, Texas
THOMAS M. DAVIS, Virginia            PAUL E. KANJORSKI, Pennsylvania
GREG WALDEN, Oregon                  MAJOR R. OWENS, New York
DOUG OSE, California                 PATSY T. MINK, Hawaii
PAUL RYAN, Wisconsin                 CAROLYN B. MALONEY, New York

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
          J. Russell George, Staff Director and Chief Counsel
                Bonnie Heald, Director of Communications
                          Grant Newman, Clerk
          Mark Stephenson, Minority Professional Staff Member

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 29, 1999....................................     1
    Text of H.R. 1827............................................     3
Statement of:
    Dinkins, Paul, executive vice president, Profit Recovery 
      Group International, accompanied by Jack Kenny, the 
      director for government, Profit Recovery Group 
      International, Inc.; Douglas R. Wilwerding, chief executive 
      officer and president, Omnium Worldwide Inc.; Terrence 
      Lyons, director of accounting, Walgreen Co.; Stephen R. 
      Booma, health care consultant; and Robert Koehler, 
      attorney-at-law, Patton Boggs, on behalf of the American 
      Logistics Association......................................   210
    Lee, Deidre, Acting Deputy Director for Management, Office of 
      Management and Budget; George H. Allen, Deputy Commander, 
      Defense Supply Center of Philadelphia; Gerald R. Peterson, 
      Chief, Accounts Payable Division, Army-Air Force Exchange 
      Service; and Michelle Snyder, Director, Financial 
      Management Office, Chief Financial Officer of the Health 
      Care Financing Administration..............................    50
    Walker, David D., Comptroller General, General Accounting 
      Office.....................................................    19
Letters, statements, et cetera, submitted for the record by:
    Allen, George H., Deputy Commander, Defense Supply Center of 
      Philadelphia, prepared statement of........................    58
    Booma, Stephen R., health care consultant, prepared statement 
      of.........................................................   237
    Burton, Hon. Dan, a Representative in Congress from the State 
      of Indiana:
        Prepared statement of....................................    17
        Regulatory News article..................................    15
    Dinkins, Paul, executive vice president, Profit Recovery 
      Group International, prepared statement of.................   213
    Horn, Hon. Stephen, a Representative in Congress from the 
      State of California, prepared statement of.................     8
    Koehler, Robert, attorney-at-law, Patton Boggs, on behalf of 
      the American Logistics Association, prepared statement of..   244
    Lee, Deidre, Acting Deputy Director for Management, Office of 
      Management and Budget:
        BEA scoring obstacle to implementing gainsharing.........   102
        Information concerning a pilot study.....................    82
        Prepared statement of....................................    52
    Lyons, Terrence, director of accounting, Walgreen Co., 
      prepared statement of......................................   231
    Peterson, Gerald R., Chief, Accounts Payable Division, Army-
      Air Force Exchange Service, prepared statement of..........    67
    Snyder, Michelle, Director, Financial Management Office, 
      Chief Financial Officer of the Health Care Financing 
      Administration:
        DOJ's guidelines.........................................    89
        HHS Y2K quarterly reports................................   106
        Information concerning dollar amounts....................    86
        June 1999 program memorandum.............................   205
        Prepared statement of....................................    77
    Turner, Hon. Jim, a Representative in Congress from the State 
      of Texas, prepared statement of............................    10
    Walker, David D., Comptroller General, General Accounting 
      Office:
        Information concerning overpayments......................39, 45
        Prepared statement of....................................    23
    Wilwerding, Douglas R., chief executive officer and 
      president, Omnium Worldwide Inc., prepared statement of....   221

        H.R. 1827, THE GOVERNMENT WASTE CORRECTIONS ACT OF 1999

                              ----------                              

                         TUESDAY, JUNE 29, 1999

                  House of Representatives,
Subcommittee on Government Management, Information, 
                                    and Technology,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:01 p.m., in 
room 2247, Rayburn House Office Building, Hon. Stephen Horn 
(chairman of the subcommittee) presiding.
    Present: Representatives Horn, Walden, Ose, Burton, and 
Turner.
    Staff present: J. Russell George, staff director; Randy 
Kaplan, counsel; Bonnie Heald, communications director; Matthew 
Ebert, policy advisor; Jane Cobb, professional staff member, 
Committee on Government Reform; Grant Newman, clerk; Justin 
Schleuter, Paul Wicker, Lauren Lefton, and John Phillips, 
interns; Michelle Ash and Faith Weiss, minority counsels; Mark 
Stephenson, minority professional staff member; and Earley 
Green, minority staff assistant.
    Mr. Horn. The Subcommittee on Government Management, 
Information, and Technology will come to order.
    Fraud, waste, and error in Federal programs and activities 
are costing taxpayers billions of dollars each year. Earlier 
this session, the Subcommittee on Government Management, 
Information, and Technology held its annual series of hearings 
on the Federal Government's financial management practices. On 
March 31, 1999, this subcommittee held a hearing examining the 
Governmentwide Consolidated Financial Statement. The audit of 
this governmentwide financial statement, performed by the 
General Accounting Office, illustrated the broad array of 
financial management problems faced by the Federal Government.
    The report confirmed that tens of billions of taxpayer 
dollars are being lost each year to waste, abuse, and 
mismanagement in hundreds of programs within the executive 
branch of the Federal Government. Improper payments made to 
vendors and others supplying goods and services to Federal 
departments and agencies is one of the most serious areas of 
waste and error. According to the General Accounting Office, 
Federal departments and agencies were unable to determine the 
full extent of improper payments in major programs, estimated 
to involve billions of dollars each year.
    At the Department of Defense, the General Accounting Office 
reported that among the most serious financial management 
weaknesses was the Department's inability to determine the full 
extent of improper payments. The Health Care Financing 
Administration's Medicare Program was cited by the General 
Accounting Office as a high-risk area for fraud, waste, and 
abuse. In 1998, there was an estimated $12.6 billion in 
Medicare overpayments.
    Today we will examine H.R. 1827, the Government Waste 
Corrections Act of 1999, introduced by my colleague and the 
chairman of this full committee, the Committee on Government 
Reform, Representative Dan Burton of Indiana. This legislation 
offers a potential solution to address the billions of dollars 
of erroneous overpayments made each year. This bill would 
require executive branch departments and agencies to use a 
process called, ``recovery auditing,'' to review Federal 
payment transactions to identify and recover erroneous 
overpayments.
    Recovery auditing is a process of reviewing payment 
transactions to identify and recover incorrect payments. 
Payments for goods and services can be processed incorrectly 
for a variety of reasons. Vendors can make pricing errors on 
their invoices. They may forget to award discounts. Or they can 
neglect to offer allowances and rebates. Recovery auditors 
review payment transactions to identify three types of errors.
    For decades, private sector companies have successfully 
used recovery auditing to identify and collect erroneous 
overpayments. Recovery auditing is currently used to a limited 
extent in the Federal Government. H.R. 1827 would expand the 
use of recovery auditing to all executive branch departments 
and agencies for payment activities of at least $10 million 
annually.
    Recovery audits could be conducted in house or contracted 
out to a private recovery audit firm. The bill would require 
recovery auditors to report on the factors causing overpayments 
and steps that can be taken to reduce such overpayment. To 
encourage agencies to participate in recovery auditing, the 
bill would allow agencies to be reimbursed for costs they incur 
for their recovery audit efforts. Additional amounts collected 
could be used by the agency to carry out management improvement 
programs.
    The subcommittee will hear from a variety of public and 
private sector witnesses who will discuss the provisions of 
H.R. 1827, including the application of recovery auditing to 
the Federal Government. I welcome our witnesses. We look 
forward to their testimony. And I am delighted now to yield for 
an opening statement to Mr. Turner of Texas, the ranking member 
on this committee. And we are delighted to have you here, Jim. 
It is all yours.
    [The text of H.R. 1827 and the prepared statement of Hon. 
Stephen Horn follow:]
106th CONGRESS
1st Session
                               H. R. 1827

   To improve the economy and efficiency of Government operations by 
       requiring the use of recovery audits by Federal agencies.

                                 ______
                                 

                    IN THE HOUSE OF REPRESENTATIVES

                              May 17, 1999

Mr. Burton of Indiana (for himself, Mr. Armey, and Mr. Ose) introduced 
 the following bill; which was referred to the Committee on Government 
                                 Reform

                                 ______
                                 

                                 A BILL

   To improve the economy and efficiency of Government operations by 
       requiring the use of recovery audits by Federal agencies.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Government Waste Corrections Act of 
1999''.

SEC. 2. FINDINGS AND PURPOSES.

    (a) Findings.--The Congress finds the following:
            (1) In private industry, overpayments to providers of goods 
        and services occur for a variety of reasons, including 
        duplicate payments, pricing errors, and missed cash discounts, 
        rebates, or other allowances. The identification and recovery 
        of such overpayments, commonly referred to as ``recovery 
        auditing'', is an established private sector business practice 
        with demonstrated large financial returns. On average, recovery 
        audits in the private sector identify payment error rates of 
        0.1 percent of purchases audited and result in the recovery of 
        $1,000,000 for each $1,000,000,000 of purchases.
            (2) Overpayments are a serious problem for Federal 
        agencies, given the magnitude and complexity of Federal 
        operations and documented and widespread financial management 
        weaknesses. Federal agency overpayments waste tax dollars and 
        detract from the efficiency and effectiveness of Federal 
        operations by diverting resources from their intended uses.
            (3) Recovery auditing already has been employed 
        successfully in limited areas of Federal activity. It has great 
        potential for expansion to many other Federal agencies and 
        activities, thereby resulting in the recovery of substantial 
        amounts of overpayments annually. Limited recovery audits 
        conducted to date have identified errors averaging 0.4 percent 
        of Federal payments audited, or $4,000,000 for every 
        $1,000,000,000 of payments. If fully implemented within the 
        Federal Government, recovery auditing has the potential to 
        recover billions of dollars in Federal overpayments annually.
    (b) Purposes.--The purposes of this Act are the following:
            (1) To require the use of recovery audits by Federal 
        agencies.
            (2) To provide incentives and resources to improve Federal 
        management practices with the goal of significantly reducing 
        Federal overpayment rates and other waste and error in Federal 
        programs.

SEC. 3. ESTABLISHMENT OF RECOVERY AUDITS REQUIREMENT.

    (a) Establishment of Requirement.--Chapter 35 of title 31, United 
States Code, is amended by adding at the end the following:

                    ``SUBCHAPTER VI--RECOVERY AUDITS

``Sec. 3561. Definitions

    ``In this subchapter, the following definitions apply:
            ``(1) Director.--The term `Director' means the Director of 
        the Office of Management and Budget.
            ``(2) Payment activity.--The term `payment activity' means 
        an executive agency activity that entails making payments to--
                    ``(A) vendors or other entities that provide 
                property or services for the direct benefit or use of 
                an executive agency; or
                    ``(B) entities that provide services or make 
                payments on behalf of the Federal Government pursuant 
                to contractual arrangements with an executive agency.
            ``(3) Recovery audit.--The term `recovery audit' means an 
        auditing process to identify overpayments made by executive 
        agencies to vendors and other commercial entities in connection 
        with a payment activity, including overpayments that result 
        from duplicate payments, pricing errors, failure to provide 
        applicable discounts, rebates, or other applicable allowances, 
        or charges or payments that are not authorized by law, 
        regulation, or other applicable requirements.

``Sec. 3562. Recovery audit requirement

    ``(a) In General.--Except as provided in subsection (d), the head 
of each executive agency--
            ``(1) shall conduct recovery audits with respect to each 
        payment activity of the executive agency that expends 
        $10,000,000 or more annually; and
            ``(2) may conduct recovery audits for any other payment 
        activity of the executive agency.
    ``(b) Procedures.--In conducting recovery audits under this 
section, the head of an executive agency--
            ``(1) shall give priority to the most recent payments;
            ``(2) shall implement this section in a manner designed to 
        ensure the greatest financial benefit to the Government; and
            ``(3) may conduct recovery audits directly, by procuring 
        performance of recovery audits by contract (subject to the 
        availability of appropriations), or by any combination thereof.
    ``(c) Recovery Audit Contracts.--
            ``(1) Executive agency authorities.--With respect to 
        recovery audits procured by an executive agency by contract--
                    ``(A) notwithstanding section 3302(b) of this 
                title, the executive agency head may pay the contractor 
                an amount not to exceed 25 percent of the total amount 
                recovered by the executive agency, through setoff and 
                otherwise, solely on the basis of information obtained 
                as a result of audits performed by the contractor under 
                the contract;
                    ``(B) the executive agency head may authorize the 
                contractor (subject to subparagraph (C)) to notify 
                entities of potential overpayments, to respond to 
                questions concerning potential overpayments, and to 
                take other administrative actions with respect to 
                overpayment claims; and
                    ``(C) subject to section 3711 of this title, the 
                executive agency head shall have final authority to 
                resolve disputes, to compromise or terminate 
                overpayment claims, to collect by setoff, and to 
                initiate litigation or referrals for litigation.
            ``(2) Contract terms and conditions.--The head of an 
        executive agency shall include in each contract for procurement 
        of performance of a recovery audit a requirement that the 
        contractor shall--
                    ``(A) provide to the executive agency periodic 
                reports on conditions giving rise to overpayments 
                identified by the contractor and any recommendations on 
                how to mitigate such conditions; and
                    ``(B) notify the executive agency of any 
                overpayments identified by the contractor pertaining to 
                the executive agency or to another executive agency 
                that are beyond the scope of the contract.
            ``(3) Executive agency action following notification.--The 
        head of an executive agency shall take prompt and appropriate 
        action in response to a notification by a contractor under 
        subparagraph (A) or (B) of paragraph (2), including forwarding 
        to other executive agencies any information that applies to 
        them.
    ``(d) Exemptions.--The Director may exempt any executive agency 
payment activity from the requirement of subsection (a)(1) if the 
Director determines that conducting recovery audits for that payment 
activity would not be practical or cost-effective.

``Sec. 3563. Recovery audit model programs

    ``(a) In General.--The Director, after consulting with executive 
agency heads, shall designate not less than five recovery audit model 
programs. The designated model programs shall--
            ``(1) reflect a representative range of executive agencies, 
        program activities, and payment practices; and
            ``(2) continue for a period of at least one year.
    ``(b) Purpose.--The purpose of the model programs designated under 
this section is to stimulate and enhance recovery audits in the Federal 
Government by developing best practices and otherwise identifying ways 
to make recovery audits more effective. In designating the model 
programs, the Director shall ensure that the designated programs 
complement, and in no way preempt or delay, other Federal recovery 
audit activities.

``Sec. 3564. Disposition of amounts collected

    ``(a) In General.--Notwithstanding section 3302(b) of this title, 
amounts an executive agency collects, by setoff and otherwise, each 
fiscal year through recovery audits conducted under this subchapter 
shall be treated in accordance with this section.
    ``(b) Use for Recovery Audit Costs.--Not more than one quarter of 
the amounts collected by an executive agency through recovery audits 
shall be available to meet obligations to recovery audit contractors 
and to reimburse applicable appropriations for other recovery audit 
costs incurred by the executive agency.
    ``(c) Use for Management Improvement Program.--Not more than one 
half of the amounts collected by an executive agency through recovery 
audits--
            ``(1) shall be available to the head of the executive 
        agency to carry out the management improvement program of the 
        agency under section 3565 of this title;
            ``(2) may be credited for that purpose by the agency head 
        to any agency appropriations and funds that are available for 
        obligation at the time of collection; and
            ``(3) shall remain available for the same period as the 
        appropriation or fund to which credited.
    ``(d) Use for Original Purpose.--Not more than one quarter of the 
amounts collected--
            ``(1) shall be credited to the appropriation or fund, if 
        any, available for obligation at the time of collection for the 
        same general purposes as the appropriation or fund from which 
        the overpayment was made; and
            ``(2) shall remain available for the same period and 
        purposes as the appropriation or fund to which credited.
    ``(e) Remainder.--Amounts collected that are not applied in 
accordance with subsection (b), (c), or (d) shall be deposited in the 
Treasury as miscellaneous receipts.
    ``(f) Limitation of Amounts.--In accordance with section 1512(d) of 
this title, the Director may reserve amounts made available to an 
executive agency under subsections (b) through (d) to the extent the 
Director determines that the full amounts otherwise available cannot be 
used productively for the purposes for which they are made available.

``Sec. 3565. Management improvement program

    ``(a) In General.--
            ``(1) Requirement.--The head of each executive agency shall 
        conduct a management improvement program, consistent with rules 
        prescribed by the Director.
            ``(2) Program features.--In conducting the program, the 
        head of the executive agency--
                    ``(A) shall, as the first priority of the program, 
                address problems that contribute directly to agency 
                overpayments; and
                    ``(B) may seek to reduce errors and waste in other 
                executive agency programs and operations by improving 
                the executive agency's staff capacity, information 
                technology, and financial management.
            ``(3) Integration with other activities.--The head of an 
        executive agency--
                    ``(A) subject to subparagraph (B), may integrate 
                the program under this section, in whole or in part, 
                with other executive agency management improvement 
                programs and activities; and
                    ``(B) must retain the ability to account 
                specifically for the use of amounts made available 
                under section 3465(b) of this title.
    ``(b) Awards.--
            ``(1) In general.--The head of an executive agency may, 
        under the program under this section and subject to the 
        availability of appropriations, pay cash awards to career 
        employees of the executive agency who have made extraordinary 
        contributions to improving the executive agency's operations in 
        a way that demonstrably and substantially reduces waste and 
        error by the executive agency.
            ``(2) Terms and conditions.--An award under this subsection 
        shall be subject to the following terms and conditions:
                    ``(A) An award may be granted to an individual 
                employee or to a group of employees, in any amount not 
                exceeding $150,000 for any individual.
                    ``(B) The award must be based on a written 
                determination by the executive agency head that the 
                awardee (or the group of awardees, collectively) was 
                directly and primarily responsible for actions that 
                result in tangible cost savings to the executive agency 
                of at least double the amount of the award.
                    ``(C) The Director must concur in any award that 
                exceeds $50,000 to any individual.
                    ``(D) The awards shall be in addition to any pay 
                and allowances to which an employee is otherwise 
                entitled, and shall not affect an employee's 
                eligibility for other bonuses and awards.
                    ``(E) The award shall be subject to such additional 
                terms and conditions as may be prescribed by the 
                Director.
            ``(3) Career employee defined.--In this subsection the term 
        `career employee' means any employee of an executive agency, 
        other than--
                    ``(A) a noncareer appointee, limited term 
                appointee, or limited emergency appointee (as such 
                terms are defined in section 3132(a) of title 5) in the 
                Senior Executive Service; and
                    ``(B) an employee in a position that has been 
                excepted from the competitive service by reason of its 
                confidential, policy-determining, policy-making, or 
                policy-advocating character.

``Sec. 3566. Responsibilities of the Office of Management and Budget

    ``(a) In General.--The Director shall be responsible for 
coordinating and overseeing the implementation of this subchapter.
    ``(b) Guidance.--In addition to the Director's specific 
responsibilities under this subchapter, the Director shall issue rules 
and provide support to agencies in implementing the subchapter. The 
Director shall issue initial rules not later than 90 days after the 
date of enactment of this subchapter.
    ``(c) Reports.--
            ``(1) In general.--Not later than one year after the date 
        of the enactment of this subchapter, and annually for each of 
        the two years thereafter, the Director shall submit a report on 
        implementation of the subchapter to the President, the 
        Committee on Government Reform of the House of Representatives, 
        the Committee on Governmental Affairs of the Senate, and the 
        Committee on Appropriations of the House of Representatives and 
        of the Senate.
            ``(2) Contents.--Each report shall include--
                    ``(A) a general description and evaluation of the 
                steps taken by executive agencies to conduct recovery 
                audits, including an inventory of the programs and 
                activities of each executive agency that are subject to 
                recovery audits;
                    ``(B) a description of any exemptions from recovery 
                audits made under section 3562(d) of this title;
                    ``(C) a description and evaluation of the recovery 
                audit model programs conducted under section 3563 of 
                this title, that shall include--
                            ``(i) an assessment of the benefits of the 
                        programs;
                            ``(ii) an identification of best practices 
                        from the programs that could be applied to 
                        other recovery audit activities; and
                            ``(iii) an identification of any 
                        significant problems or barriers to more 
                        effective recovery audits that were experienced 
                        in the model programs;
                    ``(D) a description of executive agency management 
                improvement programs under section 3565 of this title, 
                including a description of any awards under section 
                3565(b) of this title; and
                    ``(E) any recommendations for changes in executive 
                agency practices or law or other improvements that the 
                Director believes would enhance the effectiveness of 
                executive agency recovery auditing.

``Sec. 3567. General Accounting Office reports

    ``Not later than 60 days after issuance of each report under 
section 3566(c) of this title, the Comptroller General of the United 
States shall submit a report on the implementation of this subchapter 
to the Committee on Government Reform of the House of Representatives, 
the Committee on Governmental Affairs of the Senate, the Committee on 
Appropriations of the House of Representatives and of the Senate, and 
the Director.''.
    (b) Application to All Executive Agencies.--Section 3501 of title 
31, United States Code, is amended by inserting ``and subchapter VI of 
this chapter'' after ``section 3513''.
    (c) Deadline for Initiation of Recovery Audits.--The head of each 
executive agency shall begin the first recovery auditing under section 
3562 of title 31, United States Code, as amended by this section, by 
not later than 6 months after the date of the enactment of this Act.
    (d) Clerical Amendment.--The analysis at the beginning of chapter 
35 of title 31, United States Code, is amended by adding at the end the 
following:

                    ``SUBCHAPTER VI--RECOVERY AUDITS

``3561. Definitions.
``3562. Recovery audit requirement.
``3563. Recovery audit model programs.
``3564. Disposition of amounts collected.
``3565. Management improvement program.
``3566. Responsibilities of the Office of Management and Budget.
``3567. General Accounting Office reports.

                                   - 

      
    [GRAPHIC] [TIFF OMITTED] T3548.001
    
    Mr. Turner. Thank you, Mr. Chairman. This hearing, of 
course, is focused on a piece of legislation that the chairman 
of this committee, Mr. Burton, introduced last year which seeks 
to make recovery auditing mandatory for Federal agencies. I 
appreciate Chairman Horn's interest in this issue and his 
willingness to focus on it by holding this hearing.
    As we know, the Federal Government erroneously pays vendors 
and contractors billions of dollars each year and, through a 
series of financial management hearings held by this 
subcommittee, we have learned, for example, that the Medicare 
system made approximately $12 billion in erroneous payments in 
fiscal year 1998 revealing an error rate of 7 percent. 
Obviously, these kinds of errors and mistakes do not need to 
exist in our Federal agencies and I commend Chairman Burton as 
well as Chairman Horn for focusing on this problem, continuing 
to search for solutions such as recovery auditing.
    Mr. Chairman, thank you again for the opportunity to be a 
part of this very important hearing.
    [The prepared statement of Hon. Jim Turner follows:]

    [GRAPHIC] [TIFF OMITTED] T3548.002
    
    [GRAPHIC] [TIFF OMITTED] T3548.003
    
    [GRAPHIC] [TIFF OMITTED] T3548.004
    
    Mr. Horn. I thank the gentleman. And we are waiting for 
Chairman Burton. He should be here in a minute or so. So we 
will be in recess for a minute or so. When Mr. Burton arrives, 
we will have the statement read into the record.
    In the meantime, let me note, this is for some of you that 
have been here before, before this subcommittee or any 
subcommittee of the Government Reform Committee, we swear in 
all witnesses. And when we have you at the table, such as panel 
two where there are four witnesses, when we call on you in that 
sequence, the document you have given us in writing, we have 
read. And that automatically goes into the record without any 
additional motions. And we would like you to summarize those 
statements so there is more dialog with the committee members 
on both sides of the aisle to ask questions and get to the core 
of the matter.
    And we are now delighted to introduce the gentleman from 
Indiana, the chairman of the Committee on Government Reform, 
for an opening statement.
    Mr. Burton. I want to thank you, Mr. Chairman. And you will 
see, first of all, I am out of breath because I am out of 
shape. And, second, I am wearing sunglasses because I forgot to 
change these. So I don't want you to think I am a movie star or 
think I am.
    Thank you, Chairman Horn, for holding this hearing on H.R. 
1827, the Government Waste Corrections Act.
    One of my highest priorities as chairman of the Committee 
on Government Reform is to attack the widespread fraud, waste, 
and error in Federal programs and activities that cost 
taxpayers billions of dollars every year. One area where we 
bleed millions of dollars every day is in overpayments for 
contractors that often go undetected and almost never get 
repaid. Many agencies could benefit from the use of recovery 
auditing. Several of these could see substantial gains.
    The Department of Defense, the Environmental Protection 
Agency, NASA, and the Department of Energy have all been on 
GAO's high-risk list for almost 10 years for contract 
management problems. These agencies represent about $140 
billion worth of contracts yearly. DOD alone represents about 
$100 billion of this spending. How much of this is wasted in 
overpayments has not been calculated, but with the problems 
associated with these contracting operations, I would bet that 
the figures are pretty high.
    Another high-dollar, high-risk area is Medicare. Of about 
$200 billion it pays out annually, overpayments in Medicare's 
fee for service claims last year were estimated at $12.6 
billion. That is $12.6 billion in just 1 year. Over the past 3 
years, this figure is estimated at over $56 billion. This 
needless waste of money year after year significantly distorts 
the true costs of Medicare. Mr. Chairman, if nothing else, 
recovery auditing should be mandated to recoup Medicare 
overpayments.
    I just hope that when the bill passes and these 
overpayments start coming back, the checks won't be returned as 
is the current practice. And I would like to say that, Mr. 
Chairman, that I read an article that was in the Regulatory 
News and it indicated that some of these checks are being 
returned because they don't know what to do with them. And we 
certainly want to make sure that that is corrected, because if 
people are sending overpayments back to the Treasury and to the 
government----
    Mr. Horn. Without objection, that article will be put in 
the record at this point.
    [The information referred to follows:]

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    Mr. Burton. Thank you, Mr. Chairman. And this is even when 
providers voluntarily return the money, their checks are still 
returned. Mr. Chairman, I hope your subcommittee will try to 
get some answers from the representatives from HCFA today on 
that very problem.
    Let me briefly describe what my bill does. The bill 
requires agencies to conduct recovery auditing to identify and 
collect overpayments for programs that spend $10 million or 
more annually. Up to 25 percent of the money collected back can 
be used to pay the recovery audit firm, so there is no payment 
to the contractor unless the overpayments are returned. The 
bill also allows agencies to put 25 percent of collections back 
into the programs and activities from which the overpayments 
originated. Mr. Chairman, this is to provide agencies that need 
an incentive to commit to this activity.
    Requiring agencies to identify and recover overpayments is 
only one of the bill's key objectives. The other is to remedy 
the root causes that gave rise to the overpayments in the first 
place. To this end, the bill also allows for some of the money 
recovered to be available to the agency to make improvements to 
their financial and other internal systems in order to prevent 
overpayments and reduce other problems of waste and error in 
the future. Recovered moneys not used for these purposes will 
get returned to the Treasury.
    Mr. Chairman, this bill holds great promise. In places 
where recovery auditing has been tested in government, it has 
proven effective. For instance, the Army-Air Force exchange 
program [AAFES] has 16 years of experience with recovery 
auditing, having begun the practice in 1983. With purchases of 
approximately $6.5 billion annually, over $100 million has been 
recovered over the past 5 years.
    In another example, the Defense Department has been 
conducting a recovery auditing demonstration program at its 
supply center in Philadelphia. Looking at purchase transactions 
from fiscal years 1993 to 1995, over $27 million in 
overpayments have been identified. Given the billions of 
dollars we spend to procure goods and services annually and the 
magnitude of the overpayment problem in our current programs, 
this bill has enormous potential to achieve substantial cost 
savings and benefits for the government and the American 
taxpayer.
    Mr. Chairman, I stand ready to work with you, our 
Democratic colleagues, and this administration to make whatever 
improvements that are necessary to get the best bill possible. 
I want to thank you again for moving forward with the 
subcommittee consideration of this very important bill. And I 
apologize, once again, for my tardiness.
    [The prepared statement of Hon. Dan Burton follows:]

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    Mr. Horn. We thank you for putting in this bill. We think 
it has a lot of merit.
    Now if the Comptroller General will stand and raise his 
right hand?
    [Witness sworn.]
    Mr. Horn. The clerk will note that the witness affirmed the 
oath.
    And we are delighted to have you with us. It is an honor. 
And we hope you have enjoyed your first few months on the job, 
which is one of the most important in the United States. So 
welcome.

  STATEMENT OF DAVID D. WALKER, COMPTROLLER GENERAL, GENERAL 
                       ACCOUNTING OFFICE

    Mr. Walker. Thank you. Chairman Horn, Chairman Burton, 
Ranking Member Turner, I appreciate the opportunity to discuss 
H.R. 1827, the Government Waste Corrections Act of 1999 and its 
relationship to the longstanding issues of government 
accountability for use of public moneys, overpayments, and the 
role of recovery auditing in identifying and recovering 
overpayments.
    One of the most important issues facing the government 
today is the need for greater accountability in managing the 
finances of our national government. It is a significant 
problem at many agencies and one that has been the subject of 
frequent reports by us and others. One key aspect of the 
problem is the difficulty the government has in assuring proper 
payment of all of its bills while avoiding overpayments. My 
testimony today will discuss the dimensions of the overpayment 
problem, our past work on the DOD recovery auditing 
demonstration program, and the Government Waste Corrections Act 
of 1999.
    My comments on the bill reflect my belief that there are 
three principles that should guide any recovery auditing 
program. First, there should be meaningful incentives for 
agencies to want to participate in the program and to make it 
work. Second, there should be adequate safeguards to ensure 
that the program is implemented in a manner intended by 
Congress and that it preserves the integrity of the 
congressional appropriations process. And, third, there should 
be transparency in the conduct of the program. That is, there 
should be evaluation reporting on program implementation, to 
include the amounts recovered under the program and how they 
are used. In the context of these three principles, I will 
suggest opportunities to strengthen the bill.
    Significant financial systems' weaknesses, problems with 
fundamental recordkeeping and financial reporting, incomplete 
documentation, and weak internal controls continue to prevent 
the government from effectively managing its operations. 
Significant among these problems is the inability of Federal 
agencies to determine the full extent of improper payments that 
occur in major programs estimated to involve billions of 
dollars annually.
    Within the estimated billions of dollars of improper 
payments, the amount of exact overpayments that are involved is 
unknown. Given the poor state of the financial accounting 
record at many agencies, neither the Federal agencies nor we 
have a very good estimate of the extent of overpayments that 
occur each year, yet we expect that they are significant. We 
know, for example, that between the years 1994 and 1998, 
contractors returned about $4.6 billion in overpayments to the 
Department of Defense alone.
    Across government, improper payments, which includes 
overpayments, occur in a variety of programs and activities, 
including those related to contract management, Federal 
financial assistance, and tax refunds. Reported estimates of 
improper payments total billions of dollars annually. Such 
payments can result from incomplete or inaccurate data used to 
make payment decisions, insufficient monitoring or oversight, 
and other deficiencies in agency information systems and 
controls.
    The risk of improper payments is increased in programs 
involving one of three criteria: first, complex criteria for 
computing payments; second, a significant volume of 
transactions; and, third, an emphasis on expediting payments. 
The reasons for improper payments range from inadvertent errors 
to fraud and abuse.
    Recovery auditing offers the potential to identify and 
recover some of these overpayments. Recovery auditing started 
about 30 years ago and it is used in several industries 
including the automotive, retail, and food service industries. 
The DOD, the Army and Air Force Exchange Service, and the Navy 
exchange service, use recovery auditing. An external audit 
recovery group may be the only group used by an organization or 
it may be used in combination with internal resources that 
examine invoices for overpayments prior to an external group's 
review.
    Recognizing its potential to the government, in fiscal year 
1996, the National Defense Authorization Act required the 
Secretary of Defense to conduct a demonstration project to 
evaluate the feasibility of using recovery auditing and to 
identify overpayments made to vendors by DOD. Authority to 
expand the program was provided in fiscal year 1998 under the 
National Defense Authorization Act.
    The DOD demonstration project began in September 1996 when 
the Defense supply center in Philadelphia competitively 
contracted with Profit Recovery Group International [PRGI]. The 
contract covers purchases made during fiscal years 1993 to 1995 
and requires PRGI to identify and document overpayments and to 
make recommendations to reduce future overpayments. PRGI 
receives a fee of 20 percent of net collected funds. The focus 
of the demonstration program is on purchases of subsistence, 
medical, and clothing items, items that are typically found in 
retail merchandising establishments.
    We have reviewed the demonstration program and concluded 
that recovery auditing offers the potential to identify 
overpayments, but implementation problems hindered DOD from 
fully realizing the benefits of the program. As of June 1999, 
according to PRGI, it had completed 90 percent of its work and 
identified $29.3 million in overpayments made to suppliers on 
purchases of roughly $6 billion. However, collections by DOD, 
as of June 1999, only amounted to approximately $2.6 million.
    DOD has been slow to embrace recovery auditing. For 
example, in House Report 105-532, which related to a bill 
providing for fiscal year 1999 DOD authorizations, DOD was 
directed to expand the use of recovery auditing. We found, 
however, that DOD had not done so. While DOD issued an August 
1998 memorandum encouraging the use of recovery auditing and 
some activities within DOD have expressed interest in this 
concept, no contracts had been awarded at the time we completed 
our work in March 1999. We subsequently ascertained, however, 
that in June 1999, earlier this month, one of the recipients of 
the 1998 memorandum, the U.S. Transportation Command, had 
entered into such a contract and that it should be awarded in 
the near future.
    The Government Waste Corrections Act of 1999 would require 
the use of recovery auditing by Federal agencies and provide 
incentives to improve Federal management practices with the 
goal of reducing overpayments. We believe the bill is a 
positive step in the government's effort to reduce overpayments 
and to obtain timely identification and recovery of 
overpayments when they occur. The act addresses recommendations 
we made in our recent report on DOD's demonstration program. 
This includes giving the head of the executive agency the 
option to perform recovery auditing with internal staff, by 
contract, or through a combination of internal staff and 
contract resources.
    We believe it is very important that heads of agencies 
perform a sound evaluation of the applicability of recovery 
auditing to their operations and the related cost and benefits 
of undertaking internal recovery auditing before asking an 
external audit group to do such auditing. Simply stated, we 
believe that it is important to pick the low-hanging fruit 
before turning to contingency fee arrangements on the outside. 
Where recovery auditing can be cost-effectively used across 
government and whether that is the case remains somewhat of an 
open question that needs to be carefully thought through.
    We also support the bill's requirement that recovery 
auditing contractors provide periodic reports with 
recommendations on how to mitigate overpayment problems and 
that, as part of the agency's management improvement program, 
the agency is to give first priority to addressing problems 
that contribute to overpayments.
    Finally, the bill allows applicable appropriations to be 
reimbursed for costs incurred by government activities in 
supporting recovery audit efforts and to provide other 
incentives to support the use of recovery auditing. These 
features should eliminate some of the implementation problems 
we saw in the demonstration program at DOD.
    While we are positive toward the concept of recovery 
auditing and its potential for application to the Federal 
Government, the government's experience with recovery auditing 
has been limited. Thus, we think it is a good idea to further 
mandate additional model programs in Federal agencies to 
determine the applicability of recovery auditing and to develop 
best practices for their use governmentwide. In conducting the 
mandated model programs--at least five are currently provided 
for in the bill--there should be sufficient diversity in where 
recovery auditing is modeled to adequately test the concept 
among the different types of payment activities. Beyond the 
mandate of the model programs, we believe that the use of 
recovery auditing should be, at least for the time being, 
available but not mandated for other Federal agencies.
    The committee may also want to reexamine the bill's 
provisions relating to the use of recoveries made under the 
program. While financial incentives are critical to the 
program's success, incentives that are too great are 
unnecessary and may undermine the program by creating 
inappropriate disincentives to making accurate and timely 
payments in the first instance. The committee may want to 
provide for a more substantial portion of the recoveries to be 
returned to the Treasury, therefore creating a win-win 
situation whereby the agency benefits and the taxpayers benefit 
as a result of this effort, more than just the recoveries.
    We will be happy to discuss further technical comments with 
the committee staff.
    In summary, Mr. Chairman, Federal agency managers have a 
fiduciary responsibility relating to and are accountable for 
the proper use of Federal funds. Our work has shown that in 
certain cases, these responsibilities are not being exercised 
adequately and the result is billions of dollars a year in 
improper payments, a substantial portion of which represent 
overpayments that may never be recovered.
    Federal agencies need to achieve more effective control 
over their payment processes. The causes of the payment 
problems are varied and many are longstanding. The solutions 
can be found in the effective use of technology, the 
establishment of sound internal control and payment processes, 
and the wise use of human capital.
    If Federal agencies do not effectively tackle these 
challenges, they will continue to risk erroneously paying 
contractors billions of dollars and perpetuating other 
financial management problems. Effectively addressing these 
challenges, however, will require investment and sustained 
commitment by top-level management. Recovery auditing, which 
has a longstanding track record in the private sector, offers a 
low-risk opportunity to identify and recover some of these 
overpayments.
    We strongly support the provisions of H.R. 1827 providing 
for model recovery auditing programs. In this way, the 
government can assess the applicability of recovery auditing to 
different types of payments and develop the best practices for 
its use on a wider scale. In our view, with the use of model 
programs plus strong monetary incentives, it would be 
unnecessary to mandate recovery auditing across the government. 
There may also be opportunities to employ novel servicing 
arrangements, such as creating a center of excellence in a 
Federal agency to provide leadership to other agencies in 
implementing recovery auditing.
    The keys to the successful execution of governmentwide 
recovery auditing programs are: one, meaningful incentives for 
agencies to want to participate in the program and to make it 
work; two, adequate safeguards to ensure that achieving 
congressional intent is attained and that the proper use of 
appropriations is maintained; and, three, assuring transparency 
in the conduct of the program.
    Mr. Chairman, this concludes my statement. I would be happy 
to answer any questions that you or Chairman Burton may have at 
the present time.
    [The prepared statement of Mr. Walker follows:]

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    Mr. Horn. Well, I thank the gentleman for that very 
thoughtful statement and now yield for questioning to the 
chairman of the full committee, Mr. Burton of Indiana.
    Mr. Burton. The first thing that comes to my mind, which I 
alluded to in my statement, is that you said that--and I think 
about the DOD--that there was $29 million, in overpayments and 
only $2.6 million of that has been recovered? Is that correct?
    Mr. Walker. That is correct, sir.
    Mr. Burton. Well, why is that?
    Mr. Walker. There are a number of reasons, Mr. Chairman. I 
would be happy to provide more for the record, but first the 
contractor identifies the alleged overpayment and then there 
has to be actions taken on behalf of DOD in order to actually 
recover those moneys.
    Mr. Burton. What kinds of actions?
    Mr. Walker. Well----
    Mr. Burton. They have to send a bill out or a letter out 
saying there was an overpayment made and we want you to 
respond?
    Mr. Walker. Well, they would have to have some type of 
correspondence interaction. But, they typically would want to 
satisfy themselves that they agree that, in fact, there is an 
overpayment. I would be more than happy, Mr. Chairman, for the 
record, to provide some specific details if you would like.
    [The information referred to follows:]
    [GRAPHIC] [TIFF OMITTED] T3548.023
    
    Mr. Burton. Well, you know, for instance, with the 
Department of Defense, if a contractor wants to do business 
with the Department of Defense in the future on future 
contracts, if he has been overpaid to the tune of $29 million, 
it would appear to me that he would check that out pretty 
quickly and make restitution. Otherwise, he might not be able 
to be a primary bidder on a contract in the future. I don't 
know why in the world it should take a long period of time once 
you find out there are $29 million in overpayments to get it 
back and $2.6 million is not even a tenth of that. It just 
doesn't make any sense.
    Mr. Walker. Mr. Chairman, clearly it should have been 
handled more expeditiously than it has. The only thing that we 
note in my full statement that I would like to add now is 
that--it is interesting--there are actually some provisions in 
the law right now I think that also need to be looked at, 
beyond what we are addressing here.
    For example, right now the government can be required to 
pay interest if it does not make its payments on a timely 
basis. However, if contractors knowingly received overpayments, 
they are not required to pay any interest on those 
overpayments, even if they knowingly hold onto those payments 
for an extended period of time--potentially years--waiting for 
the Department of Defense to ask them.
    Mr. Burton. Well, that might be something we could even 
incorporate into this bill. If there is an overpayment made 
with the knowledge of the contractor and the contractor doesn't 
return that in a timely fashion, he pays an interest penalty. 
That is something I think our staff ought to write down and 
look at to the feasibility of putting in this bill.
    The other thing I wanted to ask you about is you said that 
you want to have these audits done internally rather than 
externally. Why? It seems to me that if it had been handled--if 
the auditing process had been handled properly in the first 
place within the agency, the overpayment would have been caught 
initially. And if the overpayment wasn't caught, what is the 
incentive for the interior auditor to correct the mistake that 
was made?
    Mr. Walker. Mr. Chairman, actually I believe what is 
important is that efforts be taken to try to capture the low-
hanging fruit.
    Mr. Burton. Well----
    Mr. Walker. Either through internal resources or external 
contractors. Either one or a combination thereof, before 
entering into contingent fee arrangements. My point is if we 
don't do that, then we can end up paying fairly significant 
contingent fees to recover overpayments that could more cost-
effectively be obtained even potentially through contractor 
resources, but not under a contingent fee arrangement.
    Mr. Burton. Well, that might drag out for a long period of 
time. I mean, the overpayments have been known for a long time. 
The agencies involved have not been collecting those 
overpayments. The reauditing after the payments have been made 
hasn't been done very effectively. And the incentive for an 
outside auditing firm to do it will stimulate them to get the 
job done. And I am not sure that stimulation would be there on 
the inside of the agency.
    Mr. Walker. I think it is facts and circumstances. Let me 
give you an example----
    Mr. Burton. And, besides, wouldn't you have to have more 
funds expended in that agency to be able to provide for this 
reauditing?
    Mr. Walker. Not necessarily. I think there could be an 
impact on the appropriations process that would have to be 
examined. Let me give you one example, Mr. Chairman. HCFA had 
about $24 billion in overpayments. They have gotten it down to 
about $12 billion. Still too high. No question about it.
    One of the things that we have been encouraging HCFA to do 
for some time, and they have adopted our recommendation, is to 
make use of commercially available software to help identify 
some of these overpayments. Such software is used widely in the 
private sector. That is something that HCFA has done, which is 
one of the reasons they found a lot of these recoveries. In 
that case, the government gets 100 cents on the dollar for all 
of the savings.
    Mr. Burton. Well, hasn't GAO reported regarding this 
reduction you are talking about that this decrease was 
attributable to better documentation provided to the auditors, 
rather than to a substantive reduction in improper payments?
    Mr. Walker. Much of it has been attributable to 
documentation, that is true. There has been some reduction in 
improper payments. But a lot of it was the documentation issue.
    Mr. Burton. Yes. Does this mean that the earlier figures 
were not accurate? I mean the higher figures there? You know, 
you said it was reduced from----
    Mr. Walker. I would say that we had better clarity as to 
the nature of what that number was. It wasn't exactly what was 
thought initially.
    Mr. Burton. But they may have been inaccurate.
    Mr. Walker. That is true. They could have been, Mr. 
Chairman.
    Mr. Burton. Have there been specific actions taken by HCFA 
over the last years or so that can be attributed to the decline 
in the overpayment estimates?
    Mr. Walker. They are taking actions now. For example, they 
have adopted our recommendation to use commercially available 
software in order to try to identify possible improper 
payments. It was a while in coming, but they have done it now.
    Mr. Burton. What is HCFA doing right now, specifically, to 
try to recover these overpayments?
    Mr. Walker. Well, they are taking a number of steps with 
both internal and external resources, including their normal 
contractual relationships to try to identify double payments; 
to try to identify payments for services that were not 
rendered; to try to identify payments where there may have been 
some upcoding with regard to the nature of the services that 
were rendered. Mr. Chairman, it is my understanding they are 
actually going to appear here after me and they would probably 
be in a better position to tell you exactly what they are 
doing.
    Mr. Burton. Well, I don't want to belabor my questioning 
because I know the chairman has questions, but I still can't 
see where these overpayments being handled within an agency 
with a reaudit would be that beneficial. I mean, if the problem 
hasn't been corrected by now, it seems like to me an exterior 
auditing firm with an incentive to really get at it would be 
more accurate and more effective. Then, of course, the problem, 
once it is identified, is getting the money in. And I still 
can't understand why, with $29 million-plus in overpayments to 
DOD, only $2.6 million has been recovered and that is something 
else we need to look into.
    Mr. Chairman, I thank you very much for yielding to me.
    Mr. Horn. Well, you are certainly welcome to continue your 
line of questioning. Because you and I have it here, we can 
take all afternoon. [Laughter.]
    Mr. Burton. Well----
    Mr. Horn. Go ahead.
    Mr. Burton. OK, sure. I mean, if you don't mind. You say 
that between fiscal years 1994 and 1998, contractors returned 
about $4.6 billion in overpayments to DOD. Were these 
overpayments voluntarily identified and returned by the 
vendors?
    Mr. Walker. It is my understanding that most of them were 
identified by the contractors.
    Mr. Burton. Was DOD even aware of the overpayments, in many 
cases?
    Mr. Walker. Not all of them, no. Their financial records--
--
    Mr. Burton. Well, that brings up this question again about 
interior auditing. I mean, if you have got auditors--don't they 
have auditors at DOD?
    Mr. Walker. They do, Mr. Burton.
    Mr. Burton. And payments are made and $4.6 billion is 
returned in overpayments and much of that was returned without 
the knowledge of the people in DOD that they were overpayments? 
And you want to have these reaudits done internally?
    Mr. Walker. Not necessarily by the same people, Mr. 
Chairman. Let me clarify. We don't oppose the use of external 
contractors. Let me make it clear. We are not saying that at 
all. We are saying that an agency may decide on day one that it 
wants to use external contractors as a means to deal with this 
issue. We don't have a problem with that.
    Mr. Burton, my only point is that one should consider, 
based upon individual facts and circumstances, if agencies 
haven't done anything to try to get the low-hanging fruit, 
whether you should go to a contingent fee arrangement on day 
one or whether you ought to try to consider another fee 
arrangement with external contractors and then go to contingent 
fees. It is just facts and circumstances.
    Mr. Burton. It seems to me that right now the auditing 
departments of all these agencies ought to be going through the 
billing records on a regular basis and finding out if 
overpayments were made. That is their job. And if they are not 
doing it now, I can't for the life of me figure out why they 
would do it if we hired some more people and put them in there.
    Mr. Walker. As you know, Mr. Chairman, we are, on record, 
for several years, as saying that many aspects of DOD's 
financial management system are a high-risk to the government. 
They don't have adequate internal controls. They don't have 
adequate accountability mechanisms. And we are trying to shine 
the light on that to try to get them to improve it.
    Mr. Burton. Well, in the short run, an exterior audit firm 
might light a fire under them. Congress can always restructure 
the auditing process. But, as far as I am concerned, there 
needs to be a strong incentive for there to be corrections in 
the auditing process. And that incentive, I think, is not going 
to come from an interior restructuring.
    Mr. Horn. Would the gentleman yield on this topic?
    Mr. Burton. Be happy to yield.
    Mr. Horn. A few years ago, I held a hearing entitled, ``The 
Defense Department: What did you do with the $25 billion we 
can't find?'' And what it seemed to get down to was what we are 
noting in some of our questions here. The Defense Finance and 
Accounting Service in Columbus, OH. Did the General Accounting 
Office go out and look at that operation or did they leave it 
to Defense? Do you know, offhand whether they took a careful 
look at it?
    Mr. Walker. Yes, we have been out there. The primary 
responsibility is with the IG but we do work at DFAS in various 
locations.
    Mr. Horn. Well, we let 2 years go by to see if they could 
clean it up. And then, presumably, they have got it down to $10 
billion we can't find. So $15 billion was accounted for.
    Now how come we got to the $25 billion? It seemed to be the 
following: No. 1, they were having GS-1s--and I hadn't heard of 
those since the first world war. I wasn't around then, but I 
read it. And apparently GS-1s were staffing some of that. And 
contractors were getting checks from the government out of that 
center and they would phone up and say, I don't have a contract 
with the government. And the Defense group there would say, 
``oh, yes, you do. Our records show you do.''
    One guy, I am told--and I don't think it is just 
apocryphal--put the check in interest earning. And he knew they 
would get around to it some day. And they did. And he paid them 
back the amount of overpayment, but he kept the interest. And 
apparently he was pretty well paid by that little thing.
    So one of the problems is the man power at what level of 
brains and knowledge. And, No. 2, the type of training that 
goes on in a center like that. It seems to me you have got to 
build in the blocks before those checks go out. And that is 
where an internal auditor ought to be working and picking 
randomly some of these checks to see if the paper matches.
    Well, what the problem was on the $25 billion is they had 
ordered $25 billion. The acquisition documents never quite 
related to the inventory documents. So you would find it if you 
could. And I just wondered the degree to which GAO is looking 
at some of it or are you taking the Inspector General's word 
for it?
    Mr. Walker. No, we are.
    Mr. Horn. Because we have great faith in the Inspector 
General over there.
    Mr. Walker. Several things, Mr. Chairman. Three things are 
really key in this area. First, people; second, process; third, 
technology. On the people front, you have mentioned two of the 
key ingredients. You have got to have people with the right 
kind of skills doing this work. They may or may not exist 
within the current organization. You may have to go out to the 
outside. And you need training for the people that are doing 
this work, if they are internal.
    Second, concerning the process, among other things, you 
need internal controls. You need solid internal controls.
    Third, concerning technology, we have to automate much of 
this and we have to integrate systems. There are so many 
different systems at DOD.
    But, you know, those are three key elements. And, in many 
cases, you are going to have to turn to contractors because you 
don't have the resources internally in order to get it done.
    Mr. Horn. OK. Go ahead. I yield back.
    Mr. Burton. Yes. My very able staff assistant just 
mentioned that, I guess in the correspondence we have had on 
this issue, the various agencies including DOD say that the 
reauditing is not a core function of the Department. And, with 
the lack of adequately trained personnel, it seems that the 
prudent thing would be to use exterior auditors until you were 
able to bring your staff up to snuff.
    Now when these overpayments voluntarily came back to the 
DOD, was that money credited back to the government or did it 
go back to the programs? Where did it go?
    Mr. Walker. I am not sure, Mr. Chairman. I can try to 
provide some more information for the record.
    Mr. Horn. Without objection, the answer of GAO will be put 
in the record at this point.
    [The information referred to follows:]

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    Mr. Walker. Thank you.
    Mr. Burton. OK. And my understanding is that in the case of 
Medicare overpayments voluntarily returned to HCFA, checks were 
returned because there was no systematic way to deal with this 
money coming back to the government. You know, that just 
boggles my mind. Somebody sends a check back to HCFA saying, 
``Hey, listen, this is an overpayment that we didn't deserve,'' 
and they sent it back him, saying, ``We are sorry. You are 
going to have to just keep the money because we don't know what 
to do with it.'' That boggles my mind--how can that happen?
    Mr. Walker. It is mind-boggling, Mr. Chairman. You are 
right there. It does happen.
    Mr. Burton. I mean, people want to do the right thing and 
send money back to the government for an overpayment and you 
say, gosh, you are just going to have to keep it because we 
don't know what to do with it?
    Mr. Walker. Well, it is mind-boggling that it would happen. 
But, there are many circumstances I mentioned earlier where, 
actually, people know it is an overpayment. They don't send it 
back because, under current law, they take the position that 
they don't have to until they are notified. And, in fact, there 
is no economic incentive for them to send it back.
    Mr. Burton. Yes, I understand. But I don't want to change 
the subject.
    Mr. Walker. Sure.
    Mr. Burton. We are talking about payments that are 
voluntarily sent back and it boggles the mind to send a check 
back to somebody just because you don't know how to enter it. 
And you are worried about reauditing? I mean, if they don't 
know how to--I mean, I took bookkeeping in college, you know. 
And it is not that hard to put it in the bank and mark it down, 
you know? I don't understand that.
    Mr. Walker. The people that actually process the payments 
that are supposed to put those in the bank aren't the ones that 
would be doing the auditing. But I hear you, Mr. Chairman.
    Mr. Burton. I understand that the places in government now 
using recovery auditing are not funded on annual appropriations 
but are set up on revolving funds or no-year accounts. In other 
words, they are attuned to a monetary bottom line like 
businesses in the private sector. In order to create this kind 
of incentive for regularly appropriated agencies, my bill would 
allow 25 percent of the moneys or up to 25 percent of the 
moneys to go back to the program that it originated from. Do 
you see any problem with that kind of an incentive?
    Mr. Walker. Mr. Chairman, we think it is essential that you 
have an incentive for the agencies to want to play and to 
participate in this program. And, in fact, what we had 
suggested was something along the lines of 50 percent of the 
money being able to go back to the agency and 50 percent going 
for the taxpayer. So I think it is crucial that you have an 
incentive for the agencies.
    Mr. Burton. OK. Finally, you said that if we required the 
use of model programs and provide the right incentives, it 
would not be necessarily to mandate the use of recovery 
auditing across the government. I think you have elaborated on 
that, but is there anything further you would like to add to 
that?
    Mr. Walker. I think it is critical that we have some 
additional model programs that look at different aspects of 
where recovery auditing might be applied. And, at least five of 
those should be required. I think, beyond that, if you provide 
the kind of incentives that we are talking about, that should 
go a long way to encouraging people to do this. And if they 
don't, you can always go to a mandate system.
    Mr. Burton. OK. Let me ask just one more question.
    Mr. Walker. Sure.
    Mr. Burton. To put a recovery auditing system in these 
agencies where it does not now exist would take time, right?
    Mr. Walker. That is correct.
    Mr. Burton. Do you have any idea what kind of time?
    Mr. Walker. Well, it depends on the program, Mr. Chairman.
    Mr. Burton. Well, it would take some time. The outside 
recovery auditing companies are ready to go right now. They 
have got the auditors there. They have done it. They have got 
the experience. Why should we wait when we know that these 
overpayments are made? We know that the waste is there. We know 
that they should be recovered. Why should we wait for a model 
program when it is going to take time to put it in place when 
we already have an outside entity that can do it?
    Mr. Walker. I guess my only point, Mr. Chairman, would be 
if you take a number like $10 million--which is what the bill 
currently proposes--if you look at the number of Federal 
entities and agencies that would be affected by that, it would 
be a significant number. The types of purchases they end up 
making are fundamentally different and I think that there would 
be a lot of time and energy spent on the contracting aspect of 
it. So it is really just a cost-benefit question, frankly, from 
a different perspective, Mr. Chairman.
    Mr. Burton. What if the threshold were raised to $50 
million or $100 million or $500 million?
    Mr. Walker. Obviously, we would have to take a look at how 
that would affect the number of entities that would potentially 
be impacted by it.
    Mr. Burton. OK. OK. Thank you, Mr. Chairman.
    Mr. Horn. Thank you. Some of this has been covered, but let 
me just ask it for the record's sake. According to your 
testimony, the General Accounting Office supports the 
provisions of the bill with Mr. Burton providing for model 
programs for recovery auditing. What are the Federal programs 
you suggest using for these model programs? Which ones would 
you say we ought to apply that to?
    Mr. Walker. Well, we don't speak to specific programs. I 
would be happy to provide something for the record if you would 
like. I do think that what we need to do is we need to analyze 
what are the different types of purchasing activities that the 
Federal Government engages in. Also, we ought to make sure that 
we have at least one program for each major type of purchasing 
activity.
    One area that is more problematic, but I think we ought to 
explore is how recovery auditing can be applied. But, there are 
some unique issues that need to be explored in the health area. 
Contractors give a lot of money in overpayments, but there are 
also some peculiarities in dealing in the health area, because 
many of these overpayments have to do with medical decisions, 
medical necessity, and the nature of the services that are 
being provided. I think that might be an example where you 
might need to take a look at it because there are specific 
things that have to be looked at that would be different than, 
for example, how it has been applied at DOD where they are 
purchasing, clothing and supplies. Recovery auditing has been 
used for decades in the private sector for those types of 
activities.
    I might add, recovery auditing has been used in health care 
as well in certain circumstances in the private sector.
    Mr. Horn. Well, would GAO say, let us start on the ones 
with the largest amount of money that are overpayments and deal 
with that?
    Mr. Walker. There is clearly a logic to that, Mr. Chairman.
    Mr. Horn. OK. Now you mentioned the purchasing models. Give 
me an idea. What are the purchasing models that you are 
thinking of?
    Mr. Walker. When you are contracting for things that are 
readily commercially available on the outside. Obviously, in 
this instance, there is clearly an application. When you are 
contracting for major weapons systems or other things that are 
customized, obviously, there is potential application there 
too, but one would have to approach it a different way.
    When you are dealing in the health care area, there is 
potential application, but there are a number of special 
considerations, given the nature of how overpayments might 
occur. Obviously, if it is a double payment or if it is for 
service that wasn't rendered, that is easier than if a judgment 
call has to be made as to whether the service that was provided 
was appropriate under the circumstances, based upon the nature 
of the illness?
    So those would be three examples, Mr. Chairman.
    Mr. Horn. OK. Another question for the record. The 
Government Waste Corrections Act of 1999 currently provides 
that of the amounts collected through recovery auditing, up to 
50 percent can be applied for management improvement programs. 
Up to 25 percent can be applied for the payment of the 
contractor and to reimburse the fund from which overpayments 
were made. You testified that you would reexamine the 
allocation of overpayment recoveries and provide for a 
substantial portion to be returned to the Department of the 
Treasury. Why do you suggest these changes and how would you 
restructure the allocations?
    Mr. Walker. Our view is that if you say that 50 percent of 
the recoveries would go to the agency either to pay for the 
contractor and/or to reinvest in their systems and programs to 
prevent this from happening in the future or to minimize it, 
that that should be enough of an incentive and should provide 
enough funding for the agencies to engage in this activity, 
especially if it is on a contingent basis where they only have 
to pay if the amounts are actually recovered.
    Mr. Horn. Well, if that is at the 50 percent mark, does 
that mean we simply apply that money to better cost recovery? 
Or do we let the agency do anything with it?
    Mr. Walker. No. I think you want to target it, as has been 
contemplated in this bill, to the types of initiatives that are 
designed to improve the systems, the controls, and the recovery 
mechanisms that the bill is intended to address.
    Mr. Horn. OK. In other words, this would relate to getting 
new human resources in auditing.
    Mr. Walker. Either systems or human capital or enhanced 
processes.
    Mr. Horn. Right. Or investment in computing.
    Mr. Walker. Correct. Technology, for example. I agree, Mr. 
Chairman.
    Mr. Horn. OK.
    Mr. Walker. One of the three: People, process, technology 
focused in this area.
    Mr. Horn. Do you feel the current ratios may create 
inappropriate incentives, which is from the bill?
    Mr. Walker. We think there clearly ought to be something 
directly in this for taxpayers. The taxpayers ought to get part 
of this recovery. And we are a little concerned, Mr. Chairman, 
that the agencies not be in a circumstance where they get 100 
cents directly or indirectly of every dollar that is recovered 
because that might create a perverse incentive for them to 
overpay in the first instance.
    Mr. Horn. Right.
    Mr. Walker. We don't want to do that.
    Mr. Horn. OK. Does the gentleman from Indiana have any 
other----
    Mr. Burton. Mr. Chairman, unfortunately I have to depart 
for another meeting. But I want to thank Mr. Walker for his 
candor and you for holding this hearing. And I hope we can work 
out any differences we might have so we can get this bill 
moving as rapidly as possible. I think we have got a little 
difference on the exterior rather than interior auditing, but 
maybe we can work that out and get a bill that we can all live 
with and save the taxpayers a lot of money.
    Mr. Walker. Thank you, Mr. Burton.
    Mr. Burton. Thank you. Thank you, Mr. Chairman.
    Mr. Horn. Thank you. And thank you, Mr. Comptroller 
General. We will now go to panel two.
    Mr. Walker. Thank you, Mr. Chairman.
    Mr. Horn. Thanks for coming.
    Panel two has the Honorable Deidre Lee, Acting Deputy 
Director for Management, Office of Management and Budget; Mr. 
George H. Allen, Deputy Commander, Defense Supply Center of 
Philadelphia; Mr. Gerald R. Peterson, Chief, Accounts Payable 
Division, Army-Air Force Exchange Service; and Ms. Michelle 
Snyder, Director, Financial Management Office, Chief Financial 
Officer of the Health Care Financing Administration.
    If you would stand and raise your right hands. And are 
there any assistants in back of you that might be talking? If 
they are, get them to stand, too. I only like these baptisms 
once. All right. Fine. We have one. Anybody else? Two. So we 
have got six witnesses to be sworn. Do you affirm--there are a 
few back there somewhere? OK. So we have got seven, then. Is 
that it? All right.
    [Witnesses sworn.]
    Mr. Horn. OK. It seems the lips were moving. Yes, it is 
eight. It was eight. OK.
    So that is taken care of and we now start with Ms. Lee. And 
we are glad to see you here. And, as you know, your statement 
is in the record. We would like you to summarize it and then we 
will have more time for questions.

     STATEMENTS OF DEIDRE LEE, ACTING DEPUTY DIRECTOR FOR 
 MANAGEMENT, OFFICE OF MANAGEMENT AND BUDGET; GEORGE H. ALLEN, 
DEPUTY COMMANDER, DEFENSE SUPPLY CENTER OF PHILADELPHIA; GERALD 
 R. PETERSON, CHIEF, ACCOUNTS PAYABLE DIVISION, ARMY-AIR FORCE 
  EXCHANGE SERVICE; AND MICHELLE SNYDER, DIRECTOR, FINANCIAL 
 MANAGEMENT OFFICE, CHIEF FINANCIAL OFFICER OF THE HEALTH CARE 
                    FINANCING ADMINISTRATION

    Ms. Lee. Thank you very much. Good afternoon, Chairman 
Horn, Mr. Ose. I am here today to discuss the administration's 
view on H.R. 1827, the Government Waste Corrections Act of 
1999. This bill would mandate that agencies use the technique 
of recovery auditing to identify and collect overpayment to 
vendors and contractors.
    At the outset, let me clearly state that we share the 
committee's desire to eliminate overpayments. Our goal is to 
make all payments correctly and on time. When we pay correctly 
the first time and on time, we prevent errors and eliminate the 
need and expense of correction and collection. Making the right 
payment at the right time is the most cost-effective approach 
for reducing erroneous payments whether the payment is made to 
a contractor, a food stamp recipient, or a Medicare provider.
    In conjunction with the Congress, the administration has 
made progress in improving overall financial management, yet 
there is more to be done. We will continue to make improving 
financial management systems and modernizing payments a high 
priority. This priority is reflected in this year's financial 
management status report and 5-year plan, which will be 
transmitted to the Congress soon.
    Progress has been made and significant initiatives are 
underway. For example, use of technology. Agencies are updating 
their financial systems, including electronic payment systems. 
These systems automate document matching, reduce errors 
associated with paper payment systems, and provide automated 
checks and edits to prevent the occurrence of duplicate 
payments, pricing errors, and missed cash discounts, rebates, 
or other allowances.
    We are also simplifying small transactions paying 
processes. The 80-20 rule applies here; 80 percent of the 
transactions equate to 20 percent of the dollars. Use of 
purchase cards also simplifies the buying process. And, as you 
know, Chairman Horn, that is near and dear to my heart as we 
talk about acquisition reform.
    By using purchase cards, we streamline the payment process 
and save the cost, both in terms of dollars and labor 
resources, for most small purchases, or the 80 percent. We are 
also revising circular 8125. You had hearings on this just a 
few weeks ago. We are focusing on ways to facilitate electronic 
payments and improve implementation of the Debt Collection Act.
    Specifically, in recovery auditing, we are working with the 
DOD to evaluate the results of their demonstration project in 
recovery auditing. In recognition of recovery auditing as a 
tool for other agencies, GSA established a multiple award 
schedule to provide Federal agencies with easy access to 
private sector experts in recovery auditing who can tailor 
techniques to meet specific agency requirements.
    We are working with the users of this schedule to gain 
additional insight into the uses and benefits of recovery 
audits. As you can see, we are focusing on paying correctly. 
H.R. 1827 includes some promising provisions: Paying for audit 
recovery services out of proceeds; gainsharing for our 
financial management improvement; identifying management 
improvement opportunities; and rewarding employee performance.
    We also have some issues with H.R. 1827, which I would like 
to highlight today. Specifically, thresholds: Requiring 
recovery audits for payment activities that expend $10 million 
or more annually. Using the industry recovery standard of $1 
million recovered for every $1 billion audited, a threshold of 
$10 million would result in gross collections of $10,000. While 
this is not insignificant, based upon work that is already done 
to certify accurate payments, as well as the cost of setting up 
the program, requiring or mandating recovery audits may not be 
cost effective at this threshold.
    Payment activity. This term may be read to include benefit 
and entitlement payments. Most major benefit and entitlement 
programs have statutory provisions for identifying and 
recovering overpayments. HCFA will address this today in their 
testimony. We need to clarify the proposed applicability and 
retain appropriate tailoring of recovery audits to specific 
programs.
    And, last, but not least, congressional appropriations. I 
think it was discussed at length with Mr. Walker, but this bill 
allows agencies to return up to 25 percent of collections to 
programs. We need to ensure that this return process is 
consistent with congressional intent and the appropriations 
process. And, also, be sure we emphasize the correct incentives 
for reaction to recovery audits.
    Mr. Chairman and members of the subcommittee, the 
administration is committed to good financial management and 
making the right payment on time. We will continue our efforts, 
working with the CFOs, to identify and address ways to improve 
accountability, specifically, payment accuracy, including 
exploring the use of recovery audits. We welcome the 
opportunity to work with you in exploring the most effective 
means of using recovery audits. And I will be pleased to answer 
any questions you may have.
    [The prepared statement of Ms. Lee follows:]

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    Mr. Horn. Thank you. We will have the questions deferred 
until after the four witnesses have testified.
    Mr. George H. Allen is the Deputy Commander, Defense Supply 
Center of Philadelphia. Welcome.
    Mr. Allen. Good afternoon, Mr. Chairman, distinguished 
members.
    I will just summarize my remarks. On behalf of the 
Department of Defense, I want to thank you for the opportunity 
to appear here before the subcommittee to describe our 
experience with recovery auditing. The 1996 Defense 
Authorization Act directed the Defense Personnel Support 
Center, which has since been renamed the Defense Supply Center 
of Philadelphia or later referred to as DSCP, to be the test 
site for demonstration of private-sector recovery auditing.
    In September 1996, DSCP competitively contracted with 
Profit Recovery Group International [PRGI] as I will refer to 
them. Although the pilot program is not complete, I can say 
with certainty, the commercial recovery auditing has proven to 
be a cost-effective practice for our center.
    Let me describe briefly how we demonstrated this commercial 
practice. As law directed, we required PRGI to audit available 
accounting and procurement records from fiscal years 1993 
through 1995. The audit base was $7.2 billion in payments to 
vendors over that 3 year period. Thus far, PRGI has identified 
potential overpayments of about $27.3 million. The overpayment 
arose from a variety of reasons, including duplicate payments, 
interest paid in error, discounts offered but not taken, 
overcharges, and breeches of the price warranty provisions in 
our contracts.
    Of the amount identified, we have collected $2.6 million, 
leaving a potential uncollected balance of $24.7 million. We 
have moved forward to issue claims to collect about $10.4 
million in those overpayments and another $2 million in 
dispersing errors. We have not yet approved $12.3 million of 
potential overpayments.
    In addition to the numerical data just reviewed, I believe 
the demonstration project has benefited our operation in three 
other ways. First, recovery auditing has allowed us to 
continuously encourage vendors to comply with contract terms 
and conditions. The additional scrutiny of recovery auditing 
has provided and will continue to provide more assurance that 
overpayments will be identified and collected promptly.
    Second, the auditing process has uncovered systemic 
problems, including the need to fine tune our automated 
payments systems to assure that we comply with all statutory 
requirements.
    And, third, dispersing errors uncovered by the auditing 
program have highlighted the need for closer oversight of the 
payment function itself and should result in the reduction of 
these types of errors in the future.
    Mr. Chairman, I would like to now briefly discuss our 
expansion plans with NDLA. The 1998 Defense Authorization Act 
directed the recovery auditing be expanded to all Defense 
Working Capital Fund activities. However, under this 
legislation, the program will be self-funding. That is, the 
audit contractor's fee will be paid from the amounts recovered. 
As with the original demonstration program, fees may not exceed 
25 percent of the total recovered. DSCP is serving as the lead 
center for expansion to other DLA agency activities. A 
competitive solicitation has been issued and we anticipate an 
award by the end of next month.
    In closing, Mr. Chairman, let me say the recovery audit 
programs have been successful at DSCP and they have become an 
integral part of our business practices in Philadelphia. And I 
am prepared to answer any questions at the appropriate time.
    [The prepared statement of Mr. Allen follows:]

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    Mr. Horn. Thank you very much, Mr. Allen.
    Our next presenter is Gerald R. Peterson, Chief, Accounts 
Payable Division of the Army and Air Force Exchange Service. 
Mr. Peterson.
    Mr. Peterson. Mr. Chairman and honorable members of the 
subcommittee, on behalf of the Army and Air Force Exchange 
Service [AAFES], thank you for the opportunity to appear before 
your committee to relate our experience with recovery audits.
    Although AAFES has over 25 businesses, our principal 
business is retail sales. We follow commercial retail best 
practices to the extent possible. Employing professional audit 
recovery firms is a best practice we adopted many years ago.
    AAFES signed its first contract with a commercial audit 
recovery firm in 1983. We currently have audit recovery 
contracts with two firms, a primary and a secondary. Firm A has 
the primary contract at a rate of 21.75 percent. It recovered 
$24.4 million last year. Firm B has the secondary contract with 
a rate of 35 percent. It recover $1.1 million last year. In 
September 1994, AAFES instituted its first in-house recovery 
effort to detect duplicate payments. The in-house group now 
recovers missed discounts and outstanding credits on supplier 
statements in addition to duplicate payments.
    We have learned that a successful audit program involves 
the following. First, partner with both suppliers and audit 
recovery firms. The relationship with a recovery firm is a 
partnership in which each provides a benefit to the other. 
Similarly, suppliers must be viewed with respect to maintain a 
long-term relationship built upon trust.
    Second, develop an in-house recovery program to augment the 
commercial recovery. During the last 5 years, AAFES' in-house 
team recovered $33.3 million at a total cost of approximately 
$465,000.
    Third, compress the audit cycle. Suppliers know most 
retailers employ audit recovery firms and getting claims after 
the fact is a part of doing business. To avoid straining a 
supplier relationship, it is important to find payment errors 
in a timely manner. No supplier appreciates having to go back 
into records that are 4 or 5 years old.
    And, fourth, learn from the recovery firm. Review what the 
commercial recovery firm is finding and determine if it is the 
result of a systemic flaw in the accounts payable process. It 
is much cheaper to fix the source of the program or to recover 
the funds through an in-house group than to pay a commercial 
firm.
    AAFES has greatly benefited from audit recovery services 
during the last 16 years. And many government agencies could 
benefit from their services as well. As presently written, 
however, there are several aspects of H.R. 1827 which will have 
a negative impact on AAFES.
    The first one is the recovery audit requirements. This 
section states, ``The executive agency head may pay the 
contractor an amount not to exceed 25 percent of the total 
amount recovered by the executive agency.'' Twenty-five percent 
may be acceptable for primary audits, but the fee paid for 
secondary audits will exceed this amount. If the bill isn't 
amended to provide higher fees for secondary audits, AAFES will 
have to cancel its contract with Firm B and lose the $700,000 
in net earnings that contributed to our bottom last year. So, 
ideally, AAFES would like to be exempted from this provision.
    The second area is disposition of amounts collected. This 
section states how funds recovered may be used. If amounts 
recovered aren't applied in accordance with this section, the 
funds revert to the Treasury. Non-appropriated funds, 
instrumentalities, NAFEs, should be totally excluded from this 
section as we generate our own operating funds. The bill should 
be amended to allow recovered funds to remain within the NAFE, 
in accordance with its operating rules.
    And, third, responsibilities of the Office of Management 
and Budget. This section sets forth the reporting requirements 
from the individual agencies. NAFEs should be totally excluded 
from this reporting requirement, especially entities such as 
ours. We work continually with our commercial recovery firms to 
maximize the recovery potential.
    For the reasons just mentioned, AAFES requests favorable 
consideration for the requested changes to the bill.
    Mr. Chairman, the Army and Air Force Exchange Service 
appreciates the opportunity to testify before this 
subcommittee. The use of audit recovery firms has been a 
success story for us. The millions of dollars recouped through 
audit recovery efforts have helped improve the quality of life 
of our stakeholders; the soldiers and airmen serving around the 
world. We support your initiative to bring best practices to 
government agencies. At the appropriate time, I will be happy 
to answer any questions you might have.
    [The prepared statement of Mr. Peterson follows:]

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    Mr. Horn. Thank you very much.
    The next presenter has one of the toughest jobs in the U.S. 
Government, and that is Ms. Snyder, being the Chief Financial 
Officer for the Health Care Financing Administration. Welcome.
    Ms. Snyder. Thank you, Mr. Horn. I have been CFO now for 4 
months and I am beginning to appreciate just how difficult this 
job is.
    Chairman Horn and distinguished subcommittee members, thank 
you for inviting us to testify about the Government Waste 
Corrections Act and our extensive efforts to prevent and recoup 
improper payment. As you know, we reduced Medicare's payment 
error rate from 14 percent to 7 percent in just 2 years. We are 
working diligently to build on this success and we are very 
grateful for this subcommittee's support in these efforts.
    We have had good success with the kind of recovery audit 
efforts described in the proposed legislation. And we believe 
that they may well have value for other government agencies as 
well.
    We, of course, have pursued a different kind of strategy in 
addition to recovery audit efforts. And that is to prevent 
improper payments from occurring in the first place. We are 
making solid progress on that front, in large part due to 
increased efforts by providers to document and file claims 
correctly. We also use nearly 100,000 computerized edits that 
detect and automatically deny payment for improper claims as 
well as manual medical record reviews and cost report audits. 
We are making solid progress in identifying and collecting 
overpayments as well.
    As you know, the HHS Inspector General audits have found 
that most Medicare claims are correct on their face. Finding 
most of our remaining payment errors requires going beyond what 
is on the claim to look at documentation and medical necessity. 
These activities are now primarily performed by our claims 
processing contractors. We recently held an open competition to 
establish a pool of new program safeguard contractors to 
augment these efforts. And the President is proposing 
legislation to further increase competition for Medicare work 
among qualified entities.
    However, the act's authorization to compensate recovery 
auditors on a contingency basis may have only limited value for 
Medicare. We recoup most overpayments by making deductions from 
future payments to providers who have been overpaid. And paying 
on a contingency basis for error identification could be 
perceived as a bounty system by health care providers. The vast 
majority of Medicare providers, we have found, make only honest 
errors and their good will and cooperation are key to much of 
our success in preventing improper payment in the first place.
    Furthermore, a financial incentive to identify errors could 
well lead to inappropriate denials and thus create errors 
instead. Our obligation is to pay correctly. And we do not want 
to deny proper payment any more than we want to make improper 
payment. Inappropriate denials resulting from contingency 
payment also could backfire on the bottom line due to increased 
costs for appeals filed by beneficiaries and providers denied 
proper payment. So while we would be willing to consider use of 
the contingency fee option, we would need to take extreme 
caution in ensuring that any use of it would, indeed, be 
constructive.
    We also generally endorse the idea of increasing funding 
for program management improvement activities that could reduce 
overpayment. We have greatly benefited from the stable source 
of program for program integrity activities provided to us 
under the Health Insurance Portability and Accountability Act, 
which totaled $560 million in fiscal year 1999 and $630 million 
in fiscal year 2000. However, we generally believe that 
recouped overpayments should be returned to the trust fund or 
general revenue fund as is now the case.
    I would also just like to take a few seconds to address the 
remarks made by Mr. Burton earlier. I have not seen the article 
to which he refers about the returned checks, but I would like 
to assure this subcommittee that we have instructed our fiscal 
intermediaries and carriers to cash checks that are returned 
and to properly credit them to the Medicare account.
    We have had some experiences in the past where people 
returning checks wanted us to say that, in cashing the check, 
that satisfied their full liability, which we have not, of 
course, been willing to do. And our instruction has been we 
will cash the check and make it clear that this does not 
necessarily release them of their liability until further 
investigation might be completed. But we would be very happy to 
work with Mr. Burton's staff to make sure that we are 
responsive, indeed, to the article that he mentioned.
    We also look forward to continuing to work with the 
subcommittee on efforts to improve Medicare program integrity. 
I thank you for holding the hearing. And would be happy to 
answer any questions you might have.
    [The prepared statement of Ms. Snyder follows:]

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    Mr. Horn. We thank you.
    And I am now going to yield to the time for questioning to 
Mr. Ose, the gentleman from California.
    Mr. Ose. Thank you, Mr. Chairman. I am going to work as 
procedurally as I can here. Ms. Lee, on your statement here the 
5-year plan will be transmitted to Congress soon?
    Ms. Lee. Yes, sir. It is in final sign-off.
    Mr. Ose. When can we expect it? I mean, is soon next week, 
next month, what is it?
    Ms. Lee. I was hoping next week, but let us say when you 
get back from recess.
    Mr. Ose. August? Or Fourth of July?
    Ms. Lee. In July.
    Mr. Ose. OK. Now, secondarily, you talked about, under the 
National Defense Authorization Act. In a pilot study four-
tenths of 1 percent of the payments sampled were incorrect. The 
pilot study must have used a sample. Again, Ms. Lee, there must 
have been a sample size or something that you looked at. It is 
on page 2 of your testimony at the bottom. I am wondering about 
the sample size.
    Ms. Lee. Can I get that for you, for the record?
    Mr. Ose. Certainly. That would be fine.
    Mr. Horn. Without objection, the response of the Deputy 
Director for Management will be put in the record at this 
point.
    [The information referred to follows:]

    I have confirmed with the Department of Defense and the 
contractor that the pilot covered $7.2 billion in payments from 
1993, 1994 and 1995 made by the Defense Supply Center in 
Philadelphia.

    Mr. Ose. Thank you, Mr. Chairman. And then on page 3, I am 
a little bit confused about something. On page 2, when we talk 
about the sample or my question about the sample sizes there is 
a statement about four-tenths of 1 percent of the payments 
sampled were incorrect, which is remarkable. And then when the 
discussion gets to the issue of the threshold, the $10 million 
threshold, there is a comment about the threshold of $10 
million would result in a gross collection of $10,000 under 
this bill if a overpayment was found. That is one-tenth of 1 
percent, if I understand.
    Ms. Lee. That is the industry standard, as we understand 
it.
    Mr. Ose. In private industry.
    Ms. Lee. In private industry.
    Mr. Ose. OK. That is not bad either.
    And then, finally, in the last page of your testimony, when 
you talked about the provisions in the middle of your--right 
above conclusion--``The bill would allow agencies to return up 
to 25 percent of collections to programs and activities from 
which the overpayment arose. These provisions could be used to 
bypass the normal Congressional Appropriations process.'' I am 
not quite sure I understood your explanation.
    Ms. Lee. We would propose that we structure the bill to 
make sure that when we returned those moneys to a program, it 
was, in fact, Congress' intent to spend the funds. For example, 
sometimes we recover after a period of time and if the program 
has been eliminated or is completed or finished, we want to 
make sure the moneys go back where you originally intended the 
moneys to be spent.
    Mr. Ose. The flaw being that if a program is terminated, 
there is no point in returning the money back to it.
    Ms. Lee. To that program, right.
    Mr. Ose. If the program is continuing, you would not have 
an objection to returning the money to that program.
    Ms. Lee. Correct.
    Mr. Ose. OK. Thank you.
    I have got more questions.
    Mr. Horn. Yes. Go ahead.
    Mr. Ose. OK. Let us see. Mr. Allen, on page 3 of your 
testimony, the fourth paragraph, you talked about DSCP's 
recoveries to date being $2 million. That is for audit work 
begun in June 1997. And what I am curious about is I don't see 
much point in spending $5 million if you only recover $2 
million. My question would be the cost of recovering the $2 
million is roughly----
    Mr. Allen. By the contract we have with PRGI, we pay them I 
believe it is 20 percent of whatever we collect.
    Mr. Ose. OK.
    Mr. Allen. We have up to $5 million under that initial 
legislative proposal to pay them, at a rate of 20 percent of 
whatever we collect.
    Mr. Ose. So, potentially, in anticipation of finding $25 
million in overpayment, you are authorized to spend up to $5 
million?
    Mr. Allen. That is correct.
    Mr. Ose. These aren't my words, as a bounty?
    Mr. Allen. That is correct.
    Mr. Ose. OK. Thank you.
    Mr. Allen. The subsequent legislation authorizes us to pay 
from the proceeds, that is, from the amounts collected.
    Mr. Ose. At the outset, there was an appropriation to pay 
the reward?
    Mr. Allen. That is correct.
    Mr. Ose. OK.
    Now, Mr. Peterson, I got the first two points on AAFES's 
request for exemption. Those being the threshold on the 
secondary audits and the reversion to Treasury of the recovered 
funds. But you lost me on the third one. You had three points 
there that you were seeking an exemption under this legislation 
for.
    Mr. Peterson. Yes. Since our program has been undergoing 
for 16 years, we feel that we have already demonstrated that we 
are following industry best practices in that we are working 
continually with our recovery firms to bring best practices to 
bear. And so for that reason, we don't feel that we should be 
reporting back to the OMB.
    Mr. Ose. Is it your rationale that as this is essentially 
self-funded----
    Mr. Peterson. Yes.
    Mr. Ose [continuing]. That these funds should stay in 
AAFES's jurisdiction?
    Mr. Peterson. That is correct. We are a non-appropriated 
fund instrumentality. We generate our own revenues through our 
sales.
    Mr. Ose. All right. On the methodology that you used for 
contractor A in your example and contractor B, I would 
presume--and maybe that is not safe to presume and you can 
correct me if it is appropriate, certainly--the methodologies 
at the outset that contractor A used generated X amount of 
recoveries. And the secondary audit firm, contractor B, used a 
slightly different methodology, I presume, that generated 
around, your example, $1.1 million.
    Mr. Peterson. Yes. We have only had the secondary audit for 
a little over 1 year.
    Mr. Ose. Well, my question really is when you have 
contractor B who uses a slightly different methodology than 
contractor A, over time do those two methodologies get merged 
so that we are continually improving the larger portion, if you 
will, of the audit work? That being, we merge methodology A and 
B in the subsequent or successive contract?
    Mr. Peterson. Sir, the two firms don't really get together 
as far as how they perform their audits. And I don't know that 
they use different techniques. I believe that the secondary 
firm probably is quite familiar with the primary and looks for 
areas where the primary has thought it wasn't beneficial to 
look. The secondary has a higher recovery rate, you know, 35 
percent versus 21 percent, so they can afford to perhaps delve 
into some areas that may not have been efficient or economical 
for the primary to do.
    Mr. Ose. My point is, as Congress looks out into the future 
and considers these challenges, not in this round of audit 
awards, if you will, but maybe the next round, is there any 
rationale for us thinking that, on an RFP or RFQ or whatever it 
is we use to enter into these contracts, that we would merge 
the methodologies?
    Mr. Peterson. Well, I don't know that those are different 
methodologies, Congressman.
    Mr. Ose. OK. You think the added result might be 
attributable to the 13.25 percent extra in the bounty, if you 
will?
    Mr. Peterson. It is that and then just looking for areas--
they may approach something--use a little different computer 
program than the first one used that might detect something 
that the first one missed.
    Mr. Ose. All right. Finally--let me make sure that is 
finally--on page 5, I think you touched on something that is 
very important to business people and that is the reach-back, 
if you will, 4 or 5 years. I can't imagine somebody coming into 
my affairs and asking me to substantiate something that 
happened in 1994. I see that the audit competition and target 
would be 30 months. Is there any possibility of even 
compressing that further?
    Mr. Peterson. Not within our industry. We approach things 
from the viewpoint of a commercial retailer, rather than that 
of a government agency because that is our primary business is 
retailing.
    Mr. Ose. Right.
    Mr. Peterson. And many of the items that our audit recovery 
tracks are year-to-date purchases and so to compress an 
internal review cycle, a primary and a secondary, into much 
less than 30 months would really be pressing the audit 
companies.
    Mr. Ose. Is the 30 months an industry standard? Or is that 
just what you have come to as fitting the----
    Mr. Peterson. That is what we have come to.
    Mr. Ose. OK.
    Mr. Peterson. That is our goal.
    Mr. Ose. Do we support--or to what degree are we providing 
resources to outside firms to do these audits? In other words, 
we have got a certain clerical staff. Are we, in effect, 
providing support staff for audit firms? Or is this a totally 
arms-length, third-party transaction where they come into 
AAFES. We are not providing or AAFES isn't providing or some of 
these other agencies isn't providing committed staff to support 
the audit done by a third party?
    Mr. Peterson. OK. We provide no people. We do provide space 
in our facility for them and we provide access to our 
computerized records.
    Mr. Ose. All right. Finally--Mr. Chairman, you are being 
very patient with me and I appreciate that.
    Mr. Horn. We have all afternoon, my friend.
    Mr. Ose. Oh, lordy, lordy. [Laughter.]
    I appreciate HCFA being----
    Mr. Horn. No, no. Forget the bells. [Laughter.]
    That is to keep us alert. [Laughter.]
    Mr. Ose. I appreciate the opportunity to visit with Ms. 
Snyder. The reason I do is that Medicare remains one of the 
largest programs we have and 14 percent, 7 percent, 5 percent 
of Medicare's number is a huge number. Which begs the 
question--and you are going to have to take me through it--you 
have got the payment error rate down in 2 years from 14 to 7 
percent. The other testimony we have heard indicates somewhat 
less than that in a payment error rate. Is it possible to get 
to the payment error rate that these other agencies are 
experiencing by their samples? And what is the relationship 
between getting to it and the cost we are likely to incur?
    Ms. Snyder. When we first started out trying to drive down 
the payment error rate, it was based off of a statistically 
valid sample and an extrapolation, if you will, of the error 
rate and the dollar amount established by the IG. And we have 
continued to use that methodology to try to measure what the 
error rate is for Medicare payments. And I would also like to 
point out that that is a measure of error. It is not a measure 
of fraud or abuse.
    Mr. Ose. I understand. I understand.
    Ms. Snyder. It is just a measure of our total due to error.
    Mr. Ose. Believe me, I know. I have had lots of 
constituents come in and talk to me about this.
    Ms. Snyder. OK. What we have found is we do believe that we 
can drive the error rate lower, since we have had such good 
success in the last 2 years. A large part of the dollars that 
we use for that came out of the MIP program, the Medicare 
Integrity Program, which was authorized under HIPPA. So we 
fully expect to spend those dollars on continuing to drive down 
the error rate. And that dollar amount does increase from year 
to year. We were at $560 million this year and it eventually 
increases to $720 million.
    I am cautiously optimistic that we can drive the error rate 
much lower than 7 percent. I think the fact that in 2 years we 
have seen good results from our corrective action plans and 
corrective activities that we have undertaken will help us 
reduce that even lower. And our goal is to get to 5 percent.
    We do recognize that in a program this large, there will 
always be some error. We don't know yet where that bottom line 
is or what that bottom line percentage is. Right now, as I 
said, we are pushing to get to 5 percent and then to evaluate 
where we can go from there. Again, I would like to point out 
that it is sort of like the old--if you will allow me--the diet 
analogy. That first 10 pounds is easy to lose. It is that last 
5 that is the killer. And we are starting to move into that 
last 5 pound range.
    So I do believe we can drive it lower. I believe that the 
funds that are available to us through the MIP program will 
help with that. The return on investment for all of our program 
integrity activities is 15 to 1, so we still have a good return 
on investment. So I am cautiously optimistic.
    Mr. Ose. So the 7 percent, again, is the rate at which we 
are able to identify the errors. And then, in terms of 
recovery, you are suggesting a 15 to 1 pay-back in terms of the 
cost that HCFA incurs in doing the identification. But how much 
or what is the--I don't even know what the----
    Ms. Snyder. The recovery.
    Mr. Ose. Yes. The recovery rate. Thank you.
    Ms. Snyder. It would be the recovery. Right. OK.
    Mr. Ose. It's my bill and I don't even know the darned 
phrase. [Laughter.]
    Ms. Snyder. We believe that we are going to recover the 
bulk of those overpayments. And, in fact, again, if you will 
remember, this is an extrapolated sample, if we look at our 
yearly activity and we look at our accounts receivable and look 
behind that, which may be a better place to look in terms of 
recoveries, what we find is that we capture back approximately 
$12 billion to $13 billion annually through offsetting 
collections and other receipts. And, of course, many of those 
dollars never show up. And I can submit the exact dollars to 
you for the record.
    Mr. Ose. I think that would be helpful, Mr. Chairman.
    Mr. Horn. Without objection, it will be put in the record 
at this point.
    [The information referred to follows:]

    The dollar amounts are: 1) new receivables for FY 1998 
total $15.4 billion; collections on receivables total $12.6 
billion; and, 3) the amount which is offset is $7.7 billion.

    Mr. Ose. My final inquiry is, Ms. Lee, Mr. Allen, and Mr. 
Peterson, if I understand correctly, you have third parties 
coming in and doing the audits in your agencies. And they are 
doing it for a fee that is negotiated and, if the pattern as 
identified by Mr. Peterson is correct, basically all we are 
providing is a desk and a phone and they bring their own 
personnel in and do the analysis. Is that correct?
    Mr. Allen. That might be more true in AAFES, who has 16 
years of experience in doing that. In case of us, within DOD, 
there is a little bit more effort than that, for a wide variety 
of reasons. Again, we are in a pilot program in DOD. We have 
not compressed our audit cycle. We are dealing with auditing 
contracts that are, in some cases, 4 years old. We have to go 
find that documentation. There is some effort associated with 
that.
    We have the Defense Finance Accounting Service in Columbus, 
OH, who makes the payments for us. They have records. They have 
to provide those records and they have to go through some 
effort to make the records available to the auditing firm for 
the audit. So I would say, initially, there is probably a lot 
more work, effort, in starting up an internal government effort 
to make records available to an outside auditing firm, but over 
time, one of the systemic things we would learn is we would be 
able to figure out how to get that effort down to next to 
nothing. And we might, then, in 16 years or in some period of 
time be somewhere close to where AAFES is.
    Mr. Ose. Let me introduce you to Mr. Peterson. He has got a 
model, I think, we ought to make----
    Mr. Allen. Well, absolutely. We benchmarked with AAFES when 
we started out the program and you are absolutely right. And we 
are doing the same thing with some other agencies today.
    Mr. Ose. Ms. Lee, is that consistent with your experience?
    Ms. Lee. We at OMB don't employ the auditors, but it 
certainly sounds very logical. And, of course, the specific 
contract terms and conditions are things that you would want 
the auditors to have access to to make sure that they have the 
right baseline.
    Mr. Ose. It is timely, Mr. Chairman, that we have these 
discussions since we are struggling with our appropriations 
and, granted, we are going to deal with it, but I daresay that 
if you were able to take Mr. Peterson's model, for instance, 
and apply it to Ms. Synder's organization and reduce not only 
the identification rate, but increase the recovery rate to 
reflect AAFES's, we would have substantially greater resources 
to commit to serving the people of this country and that is the 
underlying purpose of this bill.
    While I very much appreciate the gaps that we have not 
addressed, in terms of recovery and, if you will, the 
entitlement nature of some of your organizations, you know, we 
are going to try and fix this, subject to your testimony, and 
we are going to go forward. And I appreciate the opportunity to 
visit with you today. So, thank you. Thank you, Mr. Chairman.
    Mr. Horn. The gentleman is absolutely correct on the impact 
that it would make in a program such as Medicare. The gentleman 
from Oregon, Mr. Walden.
    Mr. Walden. Thank you, Mr. Chairman. I had a question for 
Ms. Snyder, I guess. Reading through your testimony, on page 3 
you talked about how most providers who make billing errors 
have no intent to do anything wrong, simply make honest 
mistakes, which I would tend to agree with.
    I guess what troubles me, having served 5 years on a 
community hospital board, I have seen the letters come out from 
the Department of Justice that allege just the opposite. And I 
believe it is the Fraudulent Claims Act that is invoked by the 
Justice Department on behalf of your agency, chasing claims 
that go back 8 or 9 years in some cases. Are you still using 
those tactics?
    Ms. Snyder. What we have tried to do, also, as part of our 
program integrity strategic plan, is to work to have more of a 
partnership with our providers, because we recognize some of 
the same concerns that you just raised. And we think that is 
partly why we have been so successful in pushing down the error 
rate. But through provider education, making sure that people 
understand the right way to bill, what the requirements are, 
what the right codes are, that, indeed, they are paid 
correctly, then, from the beginning. We still use the False 
Claims Act when it is appropriate. But I believe that it is 
more of a partnership effort, these days, to try to make sure 
we are paying claims correctly.
    Mr. Walden. So I guess I----
    Mr. Horn. If you could move the microphone a little closer 
to you, Ms. Snyder.
    Mr. Walden. So I guess I would say, Ms. Snyder, is, again, 
I have met with a lot of people and I represent a district with 
lots of small rural hospitals and all and reading those letters 
are extraordinarily intimidating. They say you either admit 
that you--on what is I think you have correctly recognized here 
probably a simple honest mistake, but they are being told 
either admit to false claims and fraud or we are going to come 
do major damage to your bottom line, taking a $2,000 error in 
billing and turn it into a $100,000 issue. And I thought it was 
overkill and I thought if I ever got in a position where I 
could say that, I would. Well, here I am. [Laughter.]
    And I guess----
    Ms. Snyder. And I certainly appreciate your guidance, sir.
    Mr. Walden. I also wanted to be in a position to say, in 
reverse, however--I am a bit off-topic here, but I think, 
because we are going to be putting pressure on you to go do 
this and, yet, there is this balance. And I always wondered how 
often does Medicare make payment errors on the other way? And, 
you know, what if the Fraudulent Claims False Claims Act was 
used in reverse? What is good for the goose ought to be good 
for the gander. And I am glad to see that you are kind of 
taking this a different direction.
    Not to say there isn't fraud out there. I realize there is.
    Ms. Snyder. I would just like to mention that the 
Department of Justice just recently issued new guidelines to 
try to take care of that overkill problem that you reference.
    Mr. Walden. Good.
    Mr. Horn. Can you get us those regulations?
    Ms. Snyder. Certainly.
    Mr. Horn. We will save a part at this point in the record, 
without objection, so they are spread out in this document.
    [The information referred to follows:]

    A copy of the Department of Justice's guidelines is 
provided here as an attachment to the transcript.

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    Ms. Snyder. Yes, sir.
    Mr. Horn. Thank you very much.
    Mr. Walden. I think that would be helpful because I know 
there was a lot of pressure brought in both directions.
    Ms. Snyder, in a letter back in December, I guess, of last 
year to Senator Kennedy, the administrator of HCFA stated that 
HCFA was unable to consider using private recovery specialists 
because we don't have the statutory authority to pay 
contractors a contingency fee basis. H.R. 1827 would provide 
that statutory authority. Is that something you would welcome?
    Ms. Snyder. Actually, one of the things that we are looking 
at is whether or not we would actually need a different kind of 
authority or a new authority. We believe that the authority 
that we have under the Medicare Integrity Program allows us to 
look at a variety of fee arrangements, if you will, including 
incentive payments or incentive fees with contractors. Our 
concern with that is that we would have a performance measure 
with the contractor that accounts not only for the 
identification of overpayments, but the fact that those 
overpayments are sustained through the appeals process and are, 
indeed, overpayments when we get to the end of the process.
    So we have been looking at our current authorities. There 
may be a slightly different interpretation since we responded 
to that letter. We don't believe that we need additional 
authority for recovery auditing.
    Mr. Walden. You don't. OK. All right. Thank you, Mr. 
Chairman.
    Mr. Horn. Well, that is a very important point, the 
contractor relationship within Medicare. How much control 
actually under the law do you have with the contractors on, 
say, a program such as this? On both error recovery and what 
not? Can you really get them to do it or are they just there 
and defy you?
    Ms. Snyder. No, sir. I think that, again, this is another 
relationship that has been over a very long period of time. We 
have been in business for 30 years with our fiscal 
intermediaries and carriers. We do give them direct instruction 
about activities to undertake. They have been involved in 
overpayment identification recovery audits. They do that work 
for us now. It is part of our contract agreement and budget 
agreements with them. They are paid to do that.
    We are, however, very interested--and I know that we have 
spoken about this before, about contracting reform and our 
ability to encourage competition among entities that might also 
be able to do Medicare work in addition to the insurance 
companies.
    Mr. Horn. How often does the Health Care Financing 
Administration take a look at contractors? And is there a fixed 
point in time for each contractor or how do you handle that?
    Ms. Snyder. There is a requirement that we do yearly 
contractor performance evaluations. HCFA has not been as 
diligent about that in terms of our contractor oversight, as we 
should be. Part of our performance evaluation expectations are 
around overpayment collections, financial controls, and those 
kinds of evaluation activities. We renew those contracts yearly 
and we do look at their performance.
    Mr. Horn. Anything anybody in the panel would like to state 
and comment on, based on any dialog that has gone on up here? 
Often we hear people halfway home say, gee, I wish I had said 
something about that. That isn't the way I look at it. So 
anything to add to this dialog, Mr. Peterson, based on the 
exchanges you have heard between Members and witnesses?
    Mr. Peterson. Well, I would just second the gentleman from 
GAO's comments about picking the low-hanging fruit. That is 
essentially what our internal staff does. And you notice that 
we recovered $33.8 million at a cost of less than $500,000 in 
personnel costs. So that is a very cost-effective way of 
recouping duplicate payments and missed discounts and so forth 
and displays that you can do it in-house instead of paying a 
contractor to do it. But that does not take the place of a 
commercial audit recovery firm because they possess the 
expertise that we don't have and audit recovery is not one of 
our core businesses. That is not what we are in business to do.
    We try to pay accurately the first time, but we do make 
mistakes. People make mistakes. But we try to catch them 
internally, if we can. Then, if we can't, what we miss, we pay 
the audit recovery firms to find and that is money that we 
wouldn't have if we didn't employ them.
    Mr. Horn. Is that done by an audit firm that is internally 
involved on a random sample basis? Or is that a total universe 
examined?
    Mr. Peterson. That is the total universe. They examine all 
of our records.
    Mr. Horn. What have you done as a result of their findings 
and recommendations that has lowered the amount of errors that 
have been had within the agency? Is it just a matter of 
training and getting more auditors on your own payroll? Or 
what?
    Mr. Peterson. Well, it is partly that. And it is learning 
to develop programs internally to find duplicate payments. We 
have found out that there are commercial auditors running 
computer programs looking for these. Two of our internal 
auditors wrote programs for us that we can learn ourselves, 
that our small internal staff runs on an ad hoc basis every 
month to look for these errors. We have found that they were 
finding a lot of credits on vendor statements. So we have added 
people to our internal staff to do that. And that has been very 
cost-effective.
    So we are constantly learning from them. We meet quarterly 
to see what they have found, who they are finding it from, what 
firms. We go back and look at it and find out why the errors 
occurred and try to correct them. We are not as good as what we 
would like to be, but we certainly make every conscious effort 
to improve.
    Mr. Horn. Well, I thank you for that remark. Mr. Allen.
    Mr. Allen. We want to be like AAFES. [Laughter.]
    Mr. Horn. It depends on which AAFES you are talking about, 
I think.
    Ms. Lee, any comments on this?
    Ms. Lee. Chairman Horn, one of the beauties of having this 
opportunity at OMB is to see the broad management issues. It 
struck me, in preparing for this hearing, that I saw in several 
cases where there were discussions of the contractors not, for 
whatever reason, feeling an affirmative requirement to notify 
the government if they had been or suspected they had been 
overpaid. And so I have made an action item to talk to the 
CFO's. I have pulled out the payment clauses myself and was 
reading them and saying, you know, perhaps this is something we 
ought to explore. So I have got a self-action item from this 
hearing.
    Mr. Horn. Good. Well, when you have a self-action item, I 
am sure it is completed. So thank you. Ms. Lee, on this point, 
you will recall our Debt Collection Improvement Act of 1996 
that we tucked into the Omnibus Appropriations Bill of that 
year. There was a provision in there called gainsharing that 
would allow agencies to retain a portion of delinquent debts 
collected and this provision was designed to be an incentive 
for agencies to collect delinquent debt, both in terms of human 
resources and in terms of up-to-date computing capability.
    As far as I know, no Federal department or agency is 
presently using the gainsharing program for debt collection. Do 
you know why this is?
    Ms. Lee. Chairman Horn, my understanding is we at OMB have 
some more work to do regarding budget authority and how that 
gainsharing activity plays. And we look forward to working with 
the Congressional Budget Office to sort through those issues.
    Mr. Horn. When are we going to sort it out?
    Ms. Lee. Soon.
    Mr. Horn. How soon? Next month?
    Ms. Lee. Could I try after recess, again?
    Mr. Horn. Next week? Well, after the July recess, I am all 
with you.
    Ms. Lee. I will do that.
    Mr. Horn. OK. And because there is an analogy here. And 
when you return that money, to what degree will it be used? Or 
will OMB be sitting on it to try and say the deficit is less 
than it is? I don't know what pot you put that in. Does it just 
sit in the agency accounts and they can't touch it?
    Ms. Lee. I owe you an answer.
    Mr. Horn. Pardon?
    Ms. Lee. I owe you an answer.
    Mr. Horn. OK. Without objection, Ms. Lee's answer will be 
in after the end of the July recess.
    [The information referred to follows:]

    [GRAPHIC] [TIFF OMITTED] T3548.059
    
    Mr. Horn. Very good.
    Now, Mr. Peterson, according to your statement, over the 
last 5 years, the Army-Air Force Exchange Service recovered 
about $130 million through recovery auditing and I congratulate 
you on that. What was the total amount that was audited? Was it 
all of the $130 or did you just miss some or how did it work?
    Mr. Peterson. Well, the total amount audited would have 
been, sir, approximately $5.5 or $6 billion times 5, over the 5 
years.
    Mr. Horn. Did you pick any goal when you started the 
internal function, down the line? Did you say, gee, if we get 
10 percent out of this we will be lucky and paying the bills 
and so forth? Or how did you go about it in terms of a 
strategic plan that related to how you target the--one, reduce 
the errors; two, get the recovery.
    Mr. Peterson. For the commercial audit recovery, sir, or 
the internal?
    Mr. Horn. Well, I would like to hear about both. I am 
trying to get experiences in the record here.
    Mr. Peterson. Well, I wasn't there in 1983 when we started, 
but, I guess, at that point, we knew that private industry was 
using commercial recovery firms and that we knew that we must 
have some erroneous payments, overpayments. And so we started 
our first contract back then. I don't know that we really had a 
specific goal as far as what we were going to recoup. The 
percentage in that first contract was very high. It was 35 to 
40 percent and, as we have gone forward, the percentages have 
gone down with each contract that we have administered. And 
that is due both to the competition within the recovery 
business and also the ease with which they can audit records. 
But I can't give you an answer, sir.
    Mr. Horn. Well, in other words, you used the private sector 
as the model in your business, which is sort of like the 
private sector.
    Mr. Peterson. Yes. Yes, we have applied private business 
practices whenever we can.
    Mr. Horn. Did you get a higher level of return than 
business? How close was it to----
    Mr. Peterson. No, we recover probably 95 to 98 percent of 
the claims that are validated. Now perhaps 80 percent of our 
claims that are issued are validated. So out of 100 percent, 80 
percent are valid. And, of that, we probably collect 95 to 98 
percent.
    Mr. Horn. So your cost-benefit ratio is very high, then, on 
recovery.
    Mr. Peterson. Oh, yes.
    Mr. Horn. Well, that is very helpful and I would ask both 
Mr. Peterson and Mr. Allen, of the amounts identified through 
recovery audits, how much was disputed?
    Mr. Peterson. Well, 20 percent of ours was disputed and 20 
percent is what our contracting officer agrees with, when a 
supplier comes back and says, well, this is the deal.
    Mr. Horn. And is that, essentially, how vendor disputes are 
resolved? By the actual contract officer involved?
    Mr. Peterson. Yes, it is our internal procurement or 
purchasing person who listens to the response and that person 
decides whether or not the claim is valid or not. And if it is 
valid, then we deduct from the next payments. So we get a very 
high percentage of the money. If the contracting officer feels 
that the vendor's claim rebuttal is valid, then the commercial 
recovery firm will abide by our wishes.
    Mr. Horn. Mr. Allen, does your system work the same way 
with the role of the contracting officer?
    Mr. Allen. Yes, sir, it does. Our statistics as to how much 
is initially identified as potential overpayment, how much of 
that potential overpayment is sustained as a legitimate claim 
by the contracting officer, and then, subsequently, how much of 
that claim is collected would differ because we are in the 
pilot program. I can give you those numbers if you would like.
    Mr. Horn. What are some of the most common complaints by 
vendors who are charged with overpayments?
    Mr. Allen. During our initial pilot program, I think the 
most common complaint is the one that Mr. Walden would have 
raised. He said, I am not sure I would want anybody coming into 
my records 4 years after the fact and then changing our 
business relationship, in effect. Having gotten past that, 
because there is the contract language which allows us to do 
that, we needed to get through a number of issues with regard 
to what is the proper interpretation of the contract warranty 
clause as to what discounts should have been offered and were 
not offered. A whole variety of different things.
    Because part of our business was, with regard to the 
grocery business, if you will, that is, contracts awarded on 
behalf of the Defense Commissary Agency. Some of the business 
practices in the grocery business were not typical of 
government contracting, that is, contractors would come into a 
grocery store, if you would, and issue vendor credit memos. The 
contractor said that amounts to a discount offered to you. We 
needed to go get that documentation and verify as to whether or 
not that was true. So it was the different areas of dispute 
arose first from old documents and, second, from different 
business practices within the commodities we audited.
    And I would think that might hold within virtually any 
marketplace. It would vary substantially by marketplace by 
commodity.
    Mr. Horn. Mr. Allen, the Profit Recovery Group has made 
recommendations to the Defense Supply Center of Philadelphia on 
ways to reduce future overpayments. Do you know to what degree 
these recommendations have been implemented?
    Mr. Allen. Some of them have been implemented, some of them 
have not. The ones where we will find it most difficult to 
implement are the instances where there are changes to the 
Prompt Payment Act. And, as you know, there were hearings by 
this committee earlier on that subject.
    The second area where it would be most difficult would be 
changes to systems. You have to get a certain information 
technology to make those changes, in order to accommodate 
better recordkeeping and then better audit recovery.
    We will seriously consider one of those recommendations 
because one of the prime benefits out of the recovery auditing 
is the ability to make systemic decisions. That is how you get 
from an initial identification of four-tenths of 1 percent 
overpayments down to one-tenth of 1 percent on the recurring 
basis. It is by identifying those systemic issues. And we are 
very interested in doing that.
    Mr. Horn. While we have you on systemic issues, let me ask 
the three of you here, and Ms. Lee has certainly got her right 
to get into this, and that is the year 2000 situation. To what 
degree have the more businesslike operations such as Mr. Allen 
and Mr. Peterson, to what degree are you on and how far along 
are you on year 2000 compliance?
    Mr. Peterson. Sir, we are 100 percent.
    Mr. Horn. 100?
    Mr. Peterson. Yes.
    Mr. Horn. Good. And how about you, Mr. Allen?
    Mr. Allen. I would have to provide that answer for the 
record, sir.
    Mr. Horn. Since we are looking now, Ms. Snyder, on the sort 
of quarterly basis, looking at programs, not just departments 
and their systems, and you are part of HHS, you are a big part 
of it, you are the tail that makes the dog move in one 
direction or the other, what is happening on your front with 
the year 2000?
    Ms. Snyder. The last report that I saw that was provided to 
the Deputy Secretary is that HCFA systems, mission critical 
systems, are 100----
    Mr. Horn. All right, these are your self-applied and self-
reported mission critical. But we are now saying we don't 
really care about the rest of HHS, we care can they deliver on 
Medicare?
    Ms. Snyder. We believe we are going to be there 100 
percent. The Medicare contractor systems have gone through 
their first round of certification and passed. They are now in 
recertification and testing. And the HCFA internal systems are 
in the same place. The system that I own as the business owner 
is the Financial Accounting System that has gone through its 
second round of testing and passed. We believe we are ready.
    Mr. Horn. Great. And, that will show in your next quarterly 
report? Will it? Or was it in this one?
    Ms. Snyder. Sir, I don't know. That is submitted by the 
Chief Information Officer, but I can certainly provide that for 
the record. I know those reports lag behind a little bit.
    [The information referred to follows:]

    We are pleased to submit to you the two most recent HHS Y2K 
quarterly progress resports, dated May 15, 1999, and August 13, 
1999. Both make it clear that all of HCFA's mission-critical 
internal systems and external claims processing systems were 
renovated, tested, and certified as compliant by April 1999.

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    Mr. Horn. Well, you are right. They do. We only had two 
major programs that were 100 percent and that was Social 
Security and the Weather Service. So you can get your Social 
Security check down in Miami and the weather will be nice, so--
[laughter.]
    Ms. Snyder. OK.
    Mr. Horn. Except if you have been in Miami in the summer, 
you know there is no weather nice down there.
    Ms. Snyder, in your statement you say you are currently 
using commercial off-the-shelf software to identify many of the 
same payment errors that would be identified by a recovery 
auditor. What benefits are you deriving from this software and 
how would a private recovery audit firm impact your efforts?
    Ms. Snyder. We have delivered a benefit from our correct 
coding initiative we started in 1996. I believe the cumulative 
savings have been identified at around $830 million, about $280 
million annually. We also recently purchased or leased, if you 
will, some additional software edits which we are just now 
working through to make sure they satisfy Medicare policy 
before implementing them. So we don't yet know what the return 
on that particular investment will be, although we anticipate 
that it will be a good return on the investment.
    It is an interesting question in how would recovery audit 
affect that. I think it is two different parts of the 
continuum, if you will. Most of these edits are focused at a 
pre-pay review and so they are to catch the error before it 
actually happens. So those edits are aimed at pre-payment. The 
post-pay audit would be looking at payments that got through 
that edit screen and went out the door and that we would need, 
then, to recover.
    So I think they are two different parts of overpayment 
reduction.
    Mr. Horn. Now has any of this been discussed with your 
authorizing committee or your Appropriations subcommittee, in 
terms of the systems you have developed and the attempt to 
remove the errors on overpayments? Has that question come up 
before either your authorizers or your appropriators?
    Ms. Snyder. I know that there have been discussions with 
them, certainly, over time. I haven't been party to any of 
those discussions, but I know that there have been questions 
about automated edit savings, recoveries, and that sort of 
question.
    Mr. Horn. To improve a particular computer system and their 
human resources that go with that, do you have to go to the 
Appropriation subcommittees? Or do you have the authority, 
long-range, within Medicare, to do that?
    Ms. Snyder. There are really two types of funding 
authorities that we have. One, our administrative accounts are 
subject to the general appropriations process, which is where 
most of our software development would occur, would be in that 
annual appropriations process. We also have the mandatory 
funding and the Medicare Integrity Program, which is an 
appropriation that is funded for a period of time, for a 
continuing, indefinite, authorization.
    Mr. Horn. Now, as I understand your filing here in your 
written statement, you note that in fiscal year 1998, the 
Department of Health and Human Services reported estimated 
improper payments of $12.6 billion. This amount was down from 
$20.3 billion in fiscal year 1997 and $23.2 billion in fiscal 
year 1996. What initiatives, just for the record, were used by 
the Department of Health and Human Services to reduce the 
estimated amounts of improper payments? How would you sum that 
up?
    Ms. Snyder. I would say that it was a combination of 
efforts. As you know, our error rate and our payments are a 
series of complicated kind of computations. I think probably, 
in terms of importance, probably the correct documentation and 
billing, talking to providers to get them to understand how to 
bill certainly had, we think, a huge impact. We did a number of 
seminars. We went out to medical schools and talked to 
residents who were getting ready to establish practices about 
how to bill. So a lot of those kinds of educational efforts. We 
also----
    Mr. Horn. Well, that is a very important point. Has any 
software ever been provided by Medicare for medical school 
graduates? Or do they just leave that to the private sector and 
go find your own?
    Ms. Snyder. There are two answers to that question. One, we 
provide billing software free of charge so that people will 
know how to bill through billing agents and to our 
intermediaries and carriers. But one of the things that we have 
done that I think is really innovative and it is going to have 
a pay-off is to put what is essentially computer-based 
instruction online for people to be trained in, again, how to 
bill claims, what are the right codes to use, and how do you 
get into the Medicare system.
    I think we have reached over 10,000 people at hundreds of 
sites in hospitals. We have done 44 live seminars to work on 
this problem. We have reached more than 19,000 people this year 
alone. And if you look at our website, you might find it 
interesting. There is a pre-test and a post-test. We have 
actually been able to measure knowledge increase from taking 
it. And if you are interested in the pre-test or the post-test, 
you can find it at www.Medicaretraining.com. And this is----
    Mr. Horn. Mr. Kaplan will write that down and will give me 
a thorough analysis of that. You want to give him that again?
    Ms. Snyder. It is www.Medicaretraining--one word--.com. And 
it has been a very successful web location. People are going 
into it and using it, physicians and hospitals.
    Mr. Horn. Well, that is very helpful. In your statement, 
you said that you currently use commercial off-the-shelf 
software to identify many of the same payment errors that would 
be identified by a recovery auditor. And I guess the question 
would be what benefits are you deriving from the software and 
how would a private recovery audit firm impact them? As I 
mentioned earlier that do we need a new development for this 
particular audit approach or is it satisfactory in the private 
sector already and being used by people?
    Ms. Snyder. My assumption would be that recovery auditors 
would have their own software tools to apply to a recovery 
audit and would not need special development. What would be 
important is that recovery auditors understand the use of the 
definitions of medical necessity and how Medicare claims are 
treated for purposes of payment, which would be different than 
just applying software to that evaluation. That is to look 
behind the face of the claim.
    Mr. Horn. My last question to you, Ms. Snyder, is, 
according to the April 1999 article in the Bureau of National 
Affairs Medicare report, the Health Care Financing 
Administration has yet to issue guidance for health care 
providers to return funds they inappropriately received from 
Medicare. According to the article, providers that voluntarily 
identify overpayments attempt to send checks back to HCFA, only 
to have them returned. So, can you give us a sense of how vast 
that particular situation is in terms of dollars at stake? Or, 
how many people are involved in that?
    Ms. Snyder. I would need to get back with more specifics.
    Mr. Horn. OK, without objection, it would be put at this 
point in the record.
    [The information referred to follows:]

    A copy of our June 1999 Program Memorandum, that gives 
instructions on tracking and reporting procedures for 
unsolicited/voluntary refund checks from providers/suppliers, 
is provided here as an attachment to the transcript.
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    Mr. Horn. And then has the Health Care Financing 
Administration developed guidance for the acceptance of these 
returned overpayments?
    Ms. Snyder. Yes, sir. We have. We have issued those 
instructions to our contractors.
    Mr. Horn. And, so that has already gone out, that guidance? 
There is nothing else to do on that part?
    Ms. Snyder. I believe that there will be more to do and 
that we need to followup to make sure that the guidance is, 
indeed, being followed. We have given the instructions.
    Mr. Horn. OK, so we will hold the record open to get your 
response as to the degree to which it has been passed on to the 
contractors and the degree of achievement of the guidance that 
has been to-date.
    Ms. Lee, do you have any comments, listening to this 
dialog?
    Ms. Lee. No, sir.
    Mr. Horn. OK. Well, you have all been fine witnesses and we 
appreciate you coming. I think we have got a lot of detail in 
the record to give us a feel about how this system might work 
should it become law, so thank you very much for coming.
    We now go to the last panel of the day, panel three. And 
most of the audience has already left, so panel three, we can 
stay here for hours. OK, we have Mr. Dinkins, Mr. Kenny. Let us 
see. What happened to Mr. Kenny. He is accompanying you. OK. 
And Mr. Wilwerding is OK. Mr. Lyons, Mr. Booma, and Mr. 
Koehler. Good. Anybody behind you that needs to be sworn in 
besides Mr. Kenny? Anyone behind you? We might as well get them 
on the record. Clerk will get their names.
    Anyhow, raise your right hands, please.
    [Witnesses sworn.]
    Mr. Horn. OK, the clerk will note that the six prime 
witnesses and their back-up of three are sworn in. So we will 
start with Mr. Dinkins, the executive vice president of the 
Profit Recovery Group International. And he is accompanied by 
Mr. Jack Kenny, the director for government of the Profit 
Recovery Group International. So, Mr. Dinkins, we are delighted 
to have you here.

 STATEMENTS OF PAUL DINKINS, EXECUTIVE VICE PRESIDENT, PROFIT 
 RECOVERY GROUP INTERNATIONAL, ACCOMPANIED BY JACK KENNY, THE 
 DIRECTOR FOR GOVERNMENT, PROFIT RECOVERY GROUP INTERNATIONAL, 
   INC.; DOUGLAS R. WILWERDING, CHIEF EXECUTIVE OFFICER AND 
 PRESIDENT, OMNIUM WORLDWIDE INC.; TERRENCE LYONS, DIRECTOR OF 
    ACCOUNTING, WALGREEN CO.; STEPHEN R. BOOMA, HEALTH CARE 
CONSULTANT; AND ROBERT KOEHLER, ATTORNEY-AT-LAW, PATTON BOGGS, 
        ON BEHALF OF THE AMERICAN LOGISTICS ASSOCIATION

    Mr. Dinkins. Thank you, Mr. Chairman, for the opportunity 
to testify before this committee.
    Profit Recovery Group provides a unique perspective because 
we are the largest and only public company in recovery 
auditing. We audit several trillion dollars in transactions 
annually; serve over 3,000 clients, including over half of the 
Fortune 1,000 here in the United States; and we have over 2,300 
employees in 23 countries.
    Recovery auditing is a professional service pioneered by my 
company roughly 28 years ago to identify and recover 
overpayments made to suppliers of goods and services. This 
practice has recovered billions of dollars in the private 
sector that would otherwise have remained undetected. The 
service is risk-free. Professional fees are paid from the 
proceeds of the recovered funds. The contingency fee basis for 
payment is the best possible approach we think because it 
focuses on performance and puts all of the risk on the 
contractor.
    It is a fact that every organization experiences 
overpayments. Overpayments typically occur as a result of human 
and systemic errors. Recovery auditing is most commonly applied 
by PRG in large environments. Error rates are typically small, 
however a small error rate becomes very meaningful in a large 
environment. For example, most large, private-sector 
organizations have an accuracy level of 99.9 percent in the 
private sector. The error rate of 0.1 percent becomes 
meaningful as it represents $1 million of loss for every $1 
billion of purchase.
    As you have heard from prior testimony, government has 
already been benefiting from recovery auditing. The Army-Air 
Force Exchange System has employed recovery audit services 
since the early 1980's. AAFES makes purchases of roughly $5 
billion per year and the most recently completed audit of 1998 
produced $25 million in recovered moneys. To date, PRG has 
recovered over $114 million for AAFES.
    We are now finalizing a recovery audit demonstration 
program for the Department of Defense. Approximately $25 
million in overpayments have been identified to date with over 
$4 million of this amount recovered or in the process of being 
offset. The balance is in various stages of recovery. This 
represents a rate of recovery of 0.40 percent or roughly $4 
million per $1 billion of purchase. And, Mr. Chairman, this 
rate of recovery is pretty much synonymous with what we 
experienced at AAFES.
    The program within DOD is now being expanded to the balance 
of the Defense Working Capital Fund. In our view, the expansion 
was limited to the Defense Working Capital Fund because it is a 
revolving fund and all recovered moneys go back to the fund. We 
recommend expansion of the program to the balance of the 
appropriated fund areas quickly to optimize benefits. Prior to 
the bill under review, there has been no incentive for an 
agency to conduct recovery audits in appropriated fund areas 
because moneys recovered would otherwise go back to Treasury.
    Summarizing the benefits to government, everyone wins. 
Agencies will have money returned. General government, through 
the Treasury, will recover funds. The taxpayer sees his money 
well-spent. And the Congress improves executive management. 
Hence, it seems impossible to question the value of expanding 
the process.
    Mr. Chairman, while we have suggestions to improve the 
language in this legislation, let me say at the outset that we 
very strongly support this bill. We believe that the concept 
has been well-tested over decades in the private sector--
roughly 9 years at AAFES and in the current demonstration 
program.
    There are several recommendations in my written testimony 
and I would like to focus on only two of them. First, in 
section 3562, we suggest changes to section 3. We respectfully 
submit that where the private sector has attempted to implement 
internally its own recovery audit programs, it is done only 
after years of experience with a professional service. Even 
private sector companies that have developed some internal 
capability have done so in conjunction with ongoing external 
professional services.
    Next, in section 3564. This section is written with 
recoveries of appropriated funds in mind. Revision is suggested 
and required to specify how moneys from revolving funds would 
be treated, such as the Defense Working Capital Fund; AAFES, 
which is not an appropriated fund; or HCFA, which is a trust 
fund. It is our understanding that all moneys, less contractor 
fees, should go back to these revolving funds.
    In summary, Mr. Chairman, we believe this legislation is 
both well-crafted and well-intentioned. With the incorporation 
of the recommendations proposed in our testimony, this bill 
will provide a powerful tool for all segments of government to 
recover overpayments, correct problems, enhance payment 
processes, and adopt private sector business practices. Thank 
you, Mr. Chairman.
    [The prepared statement of Mr. Dinkins follows:]
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    Mr. Horn. Well, I thank you. I am very impressed by the 
detailed recommendations you have made and that is going to be 
very helpful to us when we offer a manager's amendment, namely 
mine, to the markup. And so thank you very much for delving 
into that. I appreciate it. And we always welcome any of you 
that have some comments on the specific language of the bill. 
That is most helpful to us.
    We now go to Mr. Wilwerding. Thank you very much for 
coming. He is the chief executive officer and president of 
Omnium Worldwide Inc.
    Mr. Wilwerding. Thank you, Mr. Chairman, and good 
afternoon. On behalf of all the people at Omnium Worldwide, 
founded 30 years ago, I want to offer into testimony our 
suggestions and our analysis of this legislation and the 
important impact it can have on the Federal Government.
    Omnium Worldwide is both a domestic and international 
specialist in cost containment and receivable management 
issues. Omnium has offices in nine States as well as in Sao 
Paulo and Rio de Janeiro, Brazil, and Mexico City, Mexico. We 
operate on issues from overpaid insurance claims to precharge 
often delinquent accounts. Omnium recovers hundreds of millions 
of dollars each year for our clients.
    I have been asked to speak today because of my 14 years of 
experience in this industry. I commend the committee's desire 
to address the problem of overpayments within Federal agencies. 
My objectives today are as follows. First of all, to testify on 
the need for overpayment identification and recovery within 
Federal agencies. Second, to outline the size and potential of 
the overpayment market, specifically in the private health care 
industry, and the purpose of extending this potential to 
Federal agencies. Third, to speak on everyday practices of 
overpayment recovery in the private sector. And, finally, to 
offer some suggested changes to the language of H.R. 1827 that 
may enhance the effectiveness of the legislation.
    Our company's existence and that of the industry 
specifically formed around the identification and recovery of 
medical benefit overpayments is a testament to the problem in 
the marketplace and the need for this legislation. As defined, 
overpayments are not fraud, but common administrative and 
clerical errors, as I believe Ms. Snyder pointed out earlier 
today. One of our companies, Accent Insurance Recovery 
Solutions is the leading provider of overpayment identification 
and recovery for commercial insurers, managed care, and self-
funded organizations.
    Health care benefit overpayments occur when funds are paid 
out errantly. Numerous reasons exist for these overpayments, 
including duplicate payments, payments to ineligible 
beneficiaries, calculation errors, and payments to wrong 
providers. The vast majority of these dollars do not deal with 
medical necessity. These types of overpayments are a large 
percentage of the estimated $12.6 billion overpaid by Medicare 
in 1998.
    Private overpayment recovery firms employ state-of-the-art 
proprietary technology to identify, validate, and recover claim 
overpayments. Commercial payers outsource these functions 
because they are not the competency of the payor, pursuing 
these claims is not a cost-effective allocation of resource of 
the payor, and the capital investment to develop the technology 
infrastructure to carry out these functions is not a primary 
investment. Given that private payers use these services on a 
contingency fee basis, there is no fund outlay to realize the 
benefits of the service. The entire burden of the function 
falls on the vendor or contractor.
    In the majority of cases, Accent is asking the provider of 
service, physician, hospital or clinic for the refund. Both 
expertise and professionalism are mandatory as we work with the 
largest providers across the country daily, resolving both 
clear-cut and complicated overpayment situations. These 
cooperative relationships are of paramount importance to the 
provider, the payor, and our company. The result is a very high 
recovery rate and no provider complaints.
    Estimates are that 4 percent of total claims paid by the 
private health insurance sector are overpaid. This results in 
nearly $7.6 billion in overpayments for commercial payers. 
Contrast this with the reported 7 to 16.5 percent error rate 
for Medicare. The dollars available for identification and 
recovery are staggering. And, at this point, Mr. Chairman, I 
would like to offer in that I do state the 7.5 to 16.5 percent. 
There is record of 16.5 percent being the actual error rate 
when Medicare includes not just claims that are entirely 
overpaid, but also those that are partially overpaid, which 
does raise the estimate of dollars being lost to overpayment 
annually.
    Private recovery firms average recovery rates between 50 
and 70 percent of dollars validated as overpaid. We believe the 
success in the private sector can be mirrored in the public 
sector. Private recovery firms recover from the same providers 
that are being overpaid by Medicare. The claims payment errors 
are being made by fiscal intermediaries and carriers hired by 
HCFA to administer the claims. These contractors are the very 
same carriers who hire private recovery firms to recover their 
overpaid dollars on their commercial insurance portfolio.
    Over the last 3 years, the estimate is that HCFA has 
overpaid some $56 billion in both fraud and waste. In that same 
time period, recoveries from fines and restitutions have 
dropped 65 percent from 1997 to 1998, down to $321 million. 
Recoveries for the first half of 1999 are estimated at $176 
million. By employing private recovery firms, the Medicare 
Trust could realize conservatively billions in savings in the 
next 3 years.
    H.R. 1827 is an important step toward implementing the 
mandatory use of auditing firms. A few areas of emphasis would 
enhance the legislation and ensure success of this most 
important effort this committee is now undertaking. First, we 
suggest that both auditing and the recovery function be 
mandated. As the legislation currently reads, the recovery 
function is assumed, but not specifically stated. Auditing 
without recovery will not yield the results desired.
    Second, timeframe should be added to specify the 
appropriate lapse between the audit findings and the beginning 
of the recovery activity. This critical element determines the 
recovery success.
    Third, set-offs, while effective, are an extreme burden on 
providers and their accounting systems and I wish Mr. Walden 
was here with his experience in the hospital board. I am sure 
he would attest to the fact that the accounting of set-offs is 
very difficult for the provider to handle.
    Fourth, the committee should be very cautious in allowing 
agencies to opt out of the program. Deferrals will greatly 
reduce the recoveries and available benefits from this prudent 
legislative act.
    Fifth, some types of overpayment, audit, and recovery may 
incur expense that exceeds the 25 percent fee cap. And here I 
echo Mr. Peterson's testimony.
    Finally, the committee should consider the financial net 
benefit and allow some fee arrangements to exceed the cap where 
appropriate.
    H.R. 1827 is a very important step in the pursuit of 
merging the private sector efficiency and expertise with the 
government improvement opportunities. I appreciate the chance 
to address the committee and welcome any questions.
    [The prepared statement of Mr. Wilwerding follows:]

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    Mr. Horn. Thank you very much for that helpful statement. 
Mr. Terrence Lyons is director of accounting, the Walgreen Co.
    Mr. Lyons. Mr. Chairman, thank you for the opportunity to 
appear before this committee. My name is Terry Lyons and I am a 
director at the Walgreen Co. Walgreen's is a leading drug and 
general merchandise retailer with fiscal year sales for 1998 of 
$15.3 billion. My responsibilities include the management of 
our outsourced recovery audit process. My testimony provides a 
private sector view of recovery audit benefits and how the 
Walgreen Co. uses the process.
    Walgreen's recognized long ago the benefits of using a 
professional service provider to identify and recover 
overpayments. Purchasing and payment systems used by any volume 
intensive organization like Walgreen's are designed to be cost-
effective and to provide for maximum through-put to ensure 
timely payment of supplier invoices. However, mistakes occur, 
whether through human error or systemic breakdowns.
    Our experience has indicated that human error is the most 
common contributing factor in payment errors. Human error can 
never be entirely eliminated. Therefore, the need exists for a 
safety net to audit payment transactions for accuracy and 
validity, recover any overpayments, and to identify why 
overpayments occur.
    The most attractive advantage for utilizing a recovery 
auditing service is that there is no risk or investment 
required. The development of internal controls and/or programs 
to conduct comprehensive recovery auditing is simply not 100 
percent cost-effective. We use the largest service provider, 
the Profit Recovery Group International who has broad 
experience in many operating environments.
    The value of recovery auditing to us is apparent in the 
dollars recovered from the two most recent audit years. The 
audit of our 1996 purchases was completed in October 1998 and 
we recovered $16.9 million in overpayments on a purchase volume 
of $8.5 billion. The audit of our 1997 purchases is just now 
being completed and we expect to recover approximately $17.5 
million in overpayments against a purchase base of $9.7 
billion. Although the numbers are large, nearly $35 million 
just over the past 2 audit years, they actually indicate an 
error rate of only about 0.19 percent. Meaning that 99.8 
percent of our payable transactions were processed and paid 
correctly.
    The success of our recovery audit activity is based on a 
set of mutually identified duties and expectations from both 
parties. We, as the client, must fully support the process. We 
must provide our service provider with the access to all 
required media, both electronic and paper, needed to research, 
identify, and document any instances of overpayments and/or 
underdeductions. Points of contact are established within the 
purchasing, transportation, accounts payable, accounting, and 
finance areas to liaison with contractor personnel to provide 
whatever support is required.
    Our recovery audit firm has responsibilities and duties to 
ensure the success of their effort. They gain a full 
understanding of our purchasing and payment systems for both 
electronic and paper transactions. They meet and develop good 
working relationships with all of the designated points of 
contact within our organization and they protect our vendor 
relationships. In short, we expect our contractor to function 
in a fully outsourced manner that represents the interests of 
the Walgreen Co.
    The question of why Walgreen's would employ an outside firm 
to do recovery auditing rather than doing it internally has 
certainly occurred to you. The answer is simple. As a company, 
we have chosen to invest our developmental dollars in what we 
do best: systems and technology that provides improved 
productivity within our stores and improved customer service. 
Also the investment in technology and resources needed to 
develop this kind of capability in-house could be cost-
prohibitive. We find it attractive to outsource this function 
to a professional recovery audit firm. They have the 
technology, the resources, and the expertise to do what they do 
best.
    In summary, Mr. Chairman, we have found the use of 
professional recovery audit services to be invaluable in both 
recovering passed-over payments and improving internal 
controls. Among the major benefits: We recover millions of 
dollars each year, we incur no financial burden, the process is 
not disruptive to our normal operations, and the nature of the 
service is ongoing with benefits, year after year. As a private 
sector user of audit recovery services, I believe recovery 
auditing services for the government is a terrific idea. It 
will result in the recovery of a great deal of money and 
further demonstrate how government can benefit from private 
sector business practices. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Lyons follows:]
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    Mr. Horn. Well, we thank you for that very thorough 
statement. Our next witness is Mr. Stephen Booma, health care 
consultant who has had quite a rich experience with the 
Travelers Insurance Co. and Mutual of Omaha Insurance Co. We 
are glad to have you here.
    Mr. Booma. Thank you, Mr. Chairman. And I would like to 
thank the subcommittee for allowing me to discuss this with 
you.
    As you said, I do have quite a history with the health 
insurance industry. I am 27 years in this business. I have 24 
years with the Travelers. At the Travelers, I was president of 
their regional home office in Chicago. I also ran other 
strategic business units. At Mutual of Omaha most recently, I 
headed up their managed care area, president of their HMO 
subsidiary, and I was also responsible for all of their claim 
payment. So, in short, I was the one who had to make the 
decision to use an outside vendor or to do it in-house. And I 
will explain my comments on that. Right now I am operating as 
an insurance consultant working in mergers and acquisitions, 
but also working with companies in the managed care arena to 
improve their performance.
    Today, I would really like to address my comments as a 
private administrator of health plans. And I would say, from 
the outset, that we chose to go outside and use private 
recovery firms. I also believe strongly, at the outset, that 
the Federal Government, as the largest purchaser of health 
plans, should also use outside recovery firms.
    The reasons why. They are really pretty simple and we are 
at the point today, this afternoon, where I think we have 
discussed them enough where almost everyone is in agreement. So 
it is wonderful. But I will just maybe emphasize a couple of 
points. First, and foremost, recovery firms have the expertise 
and have the highest level of professionalism in handling this 
type of work. That is their only business. That is not the core 
business of anyone other than the recovery firms. So it makes 
perfect sense to allow the experts to do it.
    If you have someone like HCFA start to use outside recovery 
firms, you will actually see competition within other firms to 
do that work and the expertise will grow. If that expertise is 
tried to develop inside, I can almost guarantee you that I 
wouldn't see that type of growth in this level of business.
    The amount of money in overpayments is staggering. And I 
think we all agree that they can occur simply from human error. 
To me, it doesn't make any sense to have the folks that are 
making the human errors try to go get the money they made the 
errors on. Human nature tells you that if you make an error, 
there is a strong inclination not to point that out. That would 
be one of the primary reasons that we chose to go to outside, 
because we wanted people that were not attached to the process 
to make those decisions.
    In the health care business, doctors, hospitals, and health 
care providers of all kinds and insurance companies are very 
familiar with this process. And, in fact, it is not an 
adversarial process, at least on this particular process. 
Oftentimes, insurance companies, Managed Care Organizations are 
at opposite ends with providers, but providers really look for 
help in solving overpayment situations. They know, most of the 
time, that they have made overpayments. It is important to work 
with them to try to correct those overpayments and they are 
pleased when they can do that in a logical and orderly manner. 
And the recovery firms are best positioned to do that.
    Our customers understand, especially the larger ones within 
the private insurance world, that errors occur. And they are 
most interested in making sure that those errors are corrected 
and that it is done in an orderly manner. If you don't employ 
recovery firms, then the process and the length of time is 
difficult and oftentimes very burdensome. Insurance companies 
who take on the full risk of contracts for individuals or small 
groups understand the use of this too and benefit directly from 
using outside recovery firms. That was another primary reason 
why we chose to do it.
    So I would, in summary, strongly recommend that this bill 
specifically allow for insurance claims recovery for HCFA as 
well as other Federal plans. I would also emphasize that I 
think it should be mandatory. I don't think there should be 
ways to opt-out. Because if you allow them to opt-out, the 
people who are running the plans will probably want to continue 
to try to self-police themselves and that won't work. Thank 
you.
    [The prepared statement of Mr. Booma follows:]

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    Mr. Horn. Thank you. That is very helpful. Mr. Robert 
Koehler is attorney-at-law, Patton Boggs here in Washington and 
the American Logistics Association. Have we got a little room 
for you there at the table, finally? Thank you.
    Mr. Koehler. I moved from the end of the dug-out to take 
the clean-up spot. My name is Robert Koehler. I am a senior 
partner in the Washington, DC, law firm of Patton Boggs. And I 
have specialized in government contract law for the past 30 
years. I am here on behalf of the American Logistics 
Association, a trade association of some 600 manufacturers, 
brokers, and distributors who sell brand or trade-name items to 
the Federal Government. And this involves both the commissary 
systems, the Defense Supply System, as well as the non-
appropriated fund activities such as AAFES and NEXCOM.
    Because of the limit of 5 minutes, I will only highlight 
the more critical issues that we think we should address in 
this bill. Mr. Chairman, by way of background, I have been 
involved with the recovery audit associated with DSCP and PRGI 
for the past 2 years. In this regard, I represent 10 companies: 
Frito Lay, Fort James, Hunt Wesson, Johnson and Johnson, 
Kellogg, Mars, Nabisco, Pillsbury, Reckitt and Colman, 
Tropicana, and General Mills. In my past, I have worked 
extensively on the issues of price warranty as far as GSA is 
concerned; as far as this agency, DSCP, is concerned; and with 
the AAFES.
    As we look at this legislation, I think it is fair to make 
comment on what was learned--at least what we, from our 
perspective, learned--from the demonstration program. From our 
perspective, as we look at the demonstration program, it was 
envisioned to take the basic concepts that are used in the 
commercial world and apply them at the DOD level. Very simple. 
Unfortunately, it isn't that simple.
    And the difficulty, Mr. Chairman, that occurs is two 
factors. One, there are affinity contract terms and conditions 
that must be adhered to by the government in conducting either 
audits or seeking to recover claims. And, two, and most 
importantly, there are well-established Federal acquisition 
regulations that both the government and the contractor must 
comport with in these audit activities. And from our 
perspective, when DSCP and PRGI initiated their activities in 
the demonstration program, this was totally ignored.
    For example, the first thing that happened in 1996 was the 
PRGI and DSCP issuing thousands and thousands of collection 
letters to companies demanding payment, giving them 30 days to 
pay and also advising them that if the situation arose, it was 
going to withhold the funds on any outstanding invoice. And, 
fortunately, this violated the Federal Acquisition Regulation. 
We brought this to their attention and everyone of those 
letters had to be withdrawn. Six months later, new letters were 
issued. And during this time period, when we began to look at 
the process that they were going about, it became clear that 
what they were attempting to do was to develop a system that 
they relied on in the commercial activity that can't be done in 
the government sector.
    For example, they had two types of claims. What they call a 
unit price claim, which was a claim that asserted that the 
companies were not paying the most favored customer price to 
the government. The second type of claim was what they called 
the prompt payment claim. That meant that if the company was 
providing a commercial entity a prompt payment discount let us 
say of 2 percent if you pay it in 10 days, not 30 and the 
government wasn't getting that, they demanded equal treatment.
    In the commercial world, that might be appropriate. In 
government contracts, the essential thing is you have to adhere 
to the terms of the contract. And, unfortunately for the 
government and PRGI, the price warranty clause is a very 
specific document that details what is the basis upon which the 
contractor warrants his price, the average price, being most 
favorable to the government. And in our judgment, that was 
totally ignored. Now we are working now through the process of 
trying to rectify that.
    The second part was the DSCP contracting activity was 
associated with all the commissaries overseas. DSCP and PRGI 
issued claim letters and failed to look at their own 
documentation that existed in the government at the local 
commissaries levels in Europe. The industry brought this to 
their attention and, quite frankly, Mr. Chairman, raised hell 
about it. After a considerable period of time, DSCP finally got 
the funding to go over to Europe to look at these documents and 
that was done just January of this year. We are now advised 
that a significant amount of those claims that they had made 
against the companies on the unit prices may be withdrawn.
    Now the second part relates to the prompt payment discount. 
Again, we believe that the price warranty clause specifically 
requires you to consider what is an average price. What DSCP 
and PRGI have done is extracted this one element called billing 
advantage, assumed that that was not part of the average price, 
and that is where a majority of the claims are that have not 
been recovered. And the reason is because the contractors want 
the government to adhere to the terms of the contract and these 
claims, we don't think, represent that term.
    Now with this as background, we now have to look at the new 
bill. And let me say, Mr. Chairman, on behalf of all the 
companies that ALA represents, we have absolutely no objection 
to outside audit function. None whatsoever. We recognize that 
it is done throughout the government.
    But I think the key difference of what is being proposed 
here versus what exists now and what PRGI contract is even 
right now is what I think is an extremely dangerous move by 
allowing the agency to delegate extremely core responsibilities 
from the contracting officer to the audit company. And I think 
that if you will ask any government contractor, if you ask any 
government representative who has been a government contractor, 
this particular provision is of great, great concern to them.
    It is very simple, the reason. The bill establishes giving 
authority to individuals to find the claims, process the 
claims, pursue the claims, and settle them. And if you looked 
at PRGI's testimony that they gave back on June 12, that is 
exactly what they were talking about. You are also giving them 
20 percent of what they recover. That is not incentive fee, 
that is a headhunter's fee. And that, to me, is extremely 
dangerous.
    One of the principles, I think, that is lost in a lot of 
this is that government contracting under the Federal 
Acquisition Regulation is extremely different. I might note 
that Mr. Peterson, who is from AAFES here this afternoon, 
testified about their great results. Make no mistake about it, 
AAFES regulations are entirely different than DOD's. AAFES is a 
non-appropriated fund activity. It is not governed by the 
Federal Acquisition Regulation. DSCP, the commissaries, all the 
activities that you are referring to are. And that is a 
significant difference. So I think we have to analyze the 
success one might have, based upon the atmosphere that the 
regulations allow them to exist.
    Finally, ALA believes that providing the private contractor 
auditor with such a broad authority and then to receive 20 
percent presents a clear and unmistakable conflict of interest, 
violating one of the government's bedrock contracting 
principles. And I read just a portion of the Federal 
Acquisition Regulation, ``Transactions relating to the 
expenditure of public funds require the highest degree of 
public trust and impeccable standards of conduct. The general 
rule is to avoid, strictly, any conflict of interest or even 
the appearance of a conflict of interest in government 
contracting relationships.''
    And, again, the idea of giving the contractor a combination 
of the authority that the contracting officer has and the 
percentage presents, I think, a conflict that cannot be 
overcome. ALA does not have any difficulty with a continuation 
of the program. Where we have the difficulty is trying to allow 
the contractor to have that contracting responsibility. And 
that is where the major conflict arises.
    I also think that one of the issues that has arisen in our 
dealings, in discussions with the contracting officer and other 
government representatives is we have talked about attempting 
to resolve some of these issues, settle them. One of the issues 
that always comes up is, well, I might agree with you, but I 
have PRGI on the other side of me who has a contract and is 
entitled to 20 percent recovery. I have a conflict with him 
because if I settle at one level, he might assert that he is 
entitled to a higher percentage. I think the bill ought to have 
a provision that makes it very clear that the government is not 
liable in any way, shape, or form to the contractor for any 
type of offset or settlement or decision that the contracting 
officer makes in reaching that settlement vis-a-vis that 20 
percent.
    Bottom line, we support the bill only if--only if--you 
exclude from this bill the contracting officer delegation to 
the outside auditor. If it is just really a continuation, we 
have no difficulty with the bill. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Koehler follows:]

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    Mr. Horn. Thank you very much. We appreciate that 
comprehensive testimony.
    Mr. Dinkins, in your testimony, you say that the government 
will benefit from recovery auditing even more than the private 
sector. However, you also state that you do not have a broad 
enough sampling of results within the government to accurately 
project the benefit of the program. What factors support your 
conclusion that the government would realize a greater benefit 
from recovery auditing than the private sector?
    Mr. Dinkins. Well, I would say to begin with, the long 
experience that we have with AAFES at just under one-half of 
one-tenth of 1 percent and the current experience in the 
demonstration program, those numbers are roughly synonymous. So 
I wouldn't venture to state at this point--and I would say that 
the opportunity within HCFA is significantly higher than that. 
It would be billions of dollars a year and also a higher 
recovery percent. But somewhere between the private sector 
average rate of one-tenth of a percent and one-half of one-
tenth of 1 percent and probably closer to that one-half of one-
tenth of 1 percent number is the real opportunity within 
government.
    Mr. Horn. In your testimony, you recommend raising the 
threshold for payment activity, subject to recovery audits, 
from $10 million to $500 million. You stated that the amounts 
recovered from an audit of the $10 million payment program 
would not justify the costs and administrative burdens. What 
are the costs associated with performing recovery audits?
    Mr. Dinkins. That statement is probably more self-serving 
for us the contractor in the sense that we have a huge 
investment at the beginning of any effort to access all of the 
relevant media, process it through a data center, prepare and 
deploy staff, technology, hardware, et cetera. And in a smaller 
environment, those investments would not bear fruit. And I 
would point you to a corollary in the private sector. 
Typically, we looked at environments that are in excess of $500 
million. That is not to say that there wouldn't be multiple 
segments within any particular agency that would add up to $500 
million. That would obviously be well worthwhile looking at, in 
terms of the benefits to both parties.
    Mr. Horn. Well, you noted that since September 1996, when 
the Defense Supply Center of Philadelphia contracted with the 
Profit Recovery Group to perform these recovery audits, more 
than $20 million in overpayments had been identified. Only $2 
million has been recovered. Now, according to Mr. Dinkins 
statement, I guess the balance is in various stages of recovery 
and I would be curious--and Mr. Wilwerding might want to get in 
on this--what is the status of recovery of the identified by 
uncollected overpayments?
    Mr. Dinkins. Our experience in the private sector ranges in 
the high 80 percent range in terms of what is collected, as 
compared with what is identified. And, typically, the 
difference is that there is some piece of information that was 
not resident within the client's files that the supplier may 
have access to that helps to create a better understanding of 
the situation. I think that the reason for--first of all, let 
me correct a couple of figures. Where we are today is about $4 
million: $2.5 million of which is identified, another $1.5 
million which has been approved by the contracting officer and 
ready for deduction through DFAS's systems.
    I think you heard prior testimony from Mr. Allen at DSCP 
saying that there was another $10 million that was ready to go 
on top of that. I don't recall the exact numbers. There is 
about $12 million today that is identified and writing final 
determination from the contracting officer.
    Now, obviously, we don't affect collections with the 
suppliers. That is the Department of Defense's role and 
responsibility as part of the program. We identify the 
overpayments and then they pursue their normal course of action 
in terms of how to first notify the supplier that there is a 
potential overpayment, ask for their comment before anything 
further happens, and then, at an appropriate time, make an 
offset on a future payment.
    Mr. Horn. Mr. Wilwerding, do you have anything to add to 
that?
    Mr. Wilwerding. Yes, Mr. Chairman. I believe also an 
important part of that recovery percentage--and I agree with 
Mr. Dinkins that the private sector recovery percentages do 
range up toward 80 percent in some cases. A great deal of that 
is a result of the working relationship between the recovery 
vendor and the payees in these points and, on the health care, 
being the providers. In that there is a system in place to 
forward information, substantiate claims, and facilitate 
payment back and forth. That would take some time to develop on 
behalf of the government agencies, but it is very realistic to 
believe that that would be in place and would create a very 
synergistic environment to work together in that recovery 
effort.
    Mr. Horn. Well, we asked the last panel about the following 
and how are disputed over payments handled by your companies, 
when that is a dispute? Is there an organized process or an 
appeals group? Or how does it work? Is it the contract officer? 
Yes, Mr. Dinkins.
    Mr. Dinkins. That is actually not our role. That is handled 
through normal scenarios within the government and it is 
primarily a contracting officer makes the final disposition of 
any claim.
    Mr. Horn. So it works very much like in our debt collection 
legislation. If it is turned over to a private collector, why 
they simply go get the amount and if there is a problem with 
the IRS, fine, talk to the people at IRS. OK, I understand 
that. Does anybody have any other thoughts on the appeal 
process in any way? Yes, Mr. Koehler.
    Mr. Koehler. Mr. Chairman, under the Federal Acquisition 
Regulation that governs all contracts, there is no debt under 
the regulation until the contracting officer issues a 
contracting officer's final decision. At that point, when the 
contracting officer issues a decision, that then constitutes a 
debt and the government then has the option to withhold payment 
or offset, but not until that point in time. It is also the 
point in time when interest begins to run.
    I think earlier one of the panelists was talking about that 
months and months would go by with interest or years would go 
by with interest. Well, that is not true. If the government 
identifies a claim and the contracting officer issues that 
decision, that interest begins to run on those amounts at the 
Treasury rate. So I think that we have to keep that in mind as 
we move forward on this project.
    Mr. Horn. Mr. Dinkins, the Government Waste Corrections Act 
of 1999 recognizes that the identification of overpayments to 
providers of goods and services through recovery auditing has 
been used successfully in the private sector. Accordingly, the 
proposed legislation generally requires each executive branch 
agency to conduct recovery audits for its payment activities 
that expend at least $10 million annually. Although the Federal 
Government buys many of the same items as does the private 
sector, the Federal Government is also the sole buyer of other 
items, such as major weapons systems.
    With that as a preface, does the--you pronounce the 
initials here PRGI--does that Profit Recovery Group perform or 
have the capability to perform recovery audits for private 
sector companies such as United Airlines that buy from the 
aerospace industry?
    Mr. Dinkins. Yes. As a matter of fact, we do provide 
services to major airlines today.
    Mr. Horn. Major weapons systems manufacturers such as 
Boeing or Lockheed-Martin do not offer cash discounts and other 
overpayment type claims typically found in retail businesses. 
What are some of the examples of the type of overpayment claims 
you anticipate finding in major weapons systems acquisitions?
    Mr. Dinkins. Most of the identified overpayments in that 
arena would be contract compliance related issues. You still 
have incidences of duplicate payments and other types of 
errors. Contract compliance will be the key area of that 
investigation.
    Mr. Horn. We have heard from the chief financial officer of 
Medicare. I am just curious, how applicable is recovery 
auditing to health care, be it Federal level or the State 
level, or just plain old hospital level?
    Mr. Wilwerding. Mr. Chairman, we would feel that it is 
extremely applicable. Going back to my testimony, Medicare 
program is utilizing the private sector carriers to administer 
these health benefits. Those carriers are currently using 
private sector recovery firms to audit, identify, validate, and 
recover overpaid claims. They are using very similar, if not 
the same, claim systems, the same training techniques on their 
claim analysts, and the same internal audit techniques they use 
on their private sector insurance claims.
    Therefore, it would be apparent that the ability to audit 
and identify these claims and recover those claims on behalf of 
Medicare would be similar to that of the private sector.
    Mr. Lyons. I think I can speak on that issue also, Mr. 
Horn.
    Mr. Horn. Sure.
    Mr. Lyons. I was the chief operations administrator for our 
company's health insurance programs in the late 1980's and 
early 1990's. Walgreen's is self-insured and self-administered. 
And, we employed outside audit recovery firms to review health 
insurance claim payments with about a 4 percent recovery rate, 
if I recall.
    Mr. Dinkins. I would add to that, Mr. Horn, that that 
represents about 10 times the level of recovery demonstrated in 
government and other programs today. So health care typically 
offers a larger area of opportunity.
    Mr. Horn. I don't doubt that. There are big dollars at 
stake there. Mr. Wilwerding, the majority of claims deemed 
erroneous stemmed from issues of lack of medical necessity, 
incorrectly coded claims, and services paid for that were 
actually uncovered or unallowable. Given that you do not get 
involved in making medical judgments, could you describe the 
methodology you use and the type of errors you identify?
    Mr. Wilwerding. Certainly, Mr. Chairman. Our process is to 
identify errors that are primarily based on a set of data facts 
that determine the eligibility and the appropriateness of the 
claim. That may be associated with the beneficiary's 
eligibility for the program, the contract allowances, what the 
insurance policy or benefit policy covers and what it does not 
cover. They could identify things such as duplicate payments or 
payments that are not customarily made or over a certain 
program maximum amount. The validity of those claims tends to 
run very high. Of the claims we identify as potential 
overpayments, we acknowledge that some 80 percent of those 
claims will be accurately overpaid.
    We will only pursue--and I think it is an important issue 
to bring out here under contingency fees and I would assume Mr. 
Dinkins would support this--those of us that are operating on 
getting paid on successful recoveries will only pursue those 
claims that are valid overpayments. We have no incentive to 
pursue claims that we know are not valid and will not likely be 
reimbursed by the payee. It is, in the health claim area 
especially, since we deal with fairly low-balance claims and a 
high volume of those claims, extra effort is given to make sure 
that the claims we are pursuing are accepted by the provider 
and we have the data in-house to present to the provider the 
valid request for the reimbursement.
    Mr. Horn. Mr. Wilwerding, in your testimony, you state that 
it would not be efficient for the Federal departments and 
agencies to collect overpayments by offsetting future payments. 
Why would this process not be efficient?
    Mr. Wilwerding. Perhaps that testimony needs to be revised. 
It is not necessarily inefficient, but I do believe that it is 
burdensome upon the provider community and we could, at some 
point, and I could submit a statement into the testimony that 
would give an example of why this would be burdensome if you 
would prefer that.
    Mr. Horn. Mr. Lyons, does the Walgreen Co. do any of its 
recovery auditing internally?
    Mr. Lyons. We do have a small initiative, Mr. Horn. 
Frankly, we are trying to put our dollars into developing 
systems that will eliminate the post-audit recovery issues. So 
we are looking at new billing systems and new accounts payable 
systems that will tend to probably not eliminate completely, 
but at least minimize post-audit recovery activities.
    Mr. Horn. H.R. 1827, which is before us, would require a 
recovery audit contractor to provide departments and agencies 
with periodic reports on conditions giving rise to overpayments 
and recommendations on how to mitigate such conditions. What 
recommendations has the Profit Recovery Group International 
provided to the Walgreen Co. on ways to improve its payment 
processes and reduce the incidences of overpayments?
    Mr. Lyons. Well, I am not sure that I can be very specific 
in that area, although various audit recovery firms in the past 
have made specific recommendations. Typically, these are 
recommendations having to do with system changes and/or manual 
procedure changes. Some of which we have made. It is easy to 
make a manual procedure change. It is very difficult to make a 
systems change when it is tied into a fully integrated process.
    Mr. Horn. We noted earlier that the Defense Department 
contracting officer in most Federal departments deal with the 
vendor-supplier disputes over the validity of an overpayment 
identified by a recovery auditor. How does Walgreen handle 
this?
    Mr. Lyons. Well, I think the first point that I want to 
make is that the Walgreen Co. controls the audit activities. 
So, when a dispute arises, the facts typically speak for 
themselves. Is there a purchase contract? And is there the 
supporting documentation to validate the claim? Usually, if 
there is, we proceed. If there is not, we don't. And I should 
say in that respect, that I see very few post-audit recovery 
claims that do not have a tremendous amount of documentation, 
supporting documentation.
    Mr. Horn. Mr. Koehler, as I understand it, the Profit 
Recovery Group International identified overpayments, sent 
letter of indebtedness to vendors, and many vendors protested 
through their trade association, the American Logistics 
Association, for which you are counsel. Have vendors complained 
to the American Logistics Association about recovery auditing 
performed for private sector companies? And, if so, what are we 
talking about in terms of complaints?
    Mr. Koehler. Well, Mr. Chairman, the answer is no, because 
the American Logistics Association is associated just for sales 
to the Federal Government so that the association itself would 
not have access to that. I know on a personal level the 
companies that we do represent that there are two different 
types of, if you will, issues that arise on the commercial 
side. One is the ministerial or billing errors. And Mr. Lyons 
is correct. That type of documentation is relatively easy to 
see and there is very little difficulty with getting those 
resolved.
    The other area, though, is in relation to the government 
contracting, is in the application, not of those type of 
ministerial or billing errors, but rather in the interpretation 
of the price warranty clause and the attempt to enforce it. I 
think George Allen, for DECA, stated that with regard to the 
price warranty issue, that those were breech issues. Well, if 
that is the case, then that clearly is an area that should 
never be delegated to an outside contractor for resolution. 
Because only that area is the responsibility of the contracting 
officer.
    Mr. Horn. Now I gave the last panel the chance to have 
anything to say that they haven't said in the dialog either 
between the Chair and the panel or within the panel. So anybody 
want to get something off their chest now into the record? Any 
takers on that?
    Well, we thank you very much for coming. We appreciate the 
knowledge you bring to this and the experience. And that will 
be very helpful in marking up the bill.
    I would now like to thank the following people for setting 
up this particular hearing: The Government Management, 
Information, and Technology Subcommittee staff is headed by its 
staff director, Russell George, and chief counsel--I don't see 
him right now. The person to my left, to your right, who has 
put most of the effort into this particular hearing, is Randy 
Kaplan; who is also counsel to the subcommittee and a 
professional staff member. Matthew Ebert, policy advisor, is 
back here on the bench. Jane Cobb of the full committee, is 
liaison on this bill, with Mr. Burton's interest. And we have 
Bonnie Heald, director of communications, probably with 
somebody in the media here. And Grant Newman, our clerk, 
against the wall over there. We have John Phillips, intern. And 
then Paul Wicker, intern; Justin Schlueter, intern; Lauren 
Lefton, intern.
    And, for the Democratic side, Faith Weiss, the minority 
counsel; Earley Green, minority staff assistant. And Yon Lupu, 
the court reporter.
    So thank you all. And, with that, this hearing is 
adjourned.
    [Whereupon, at 5:01 p.m., the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
follows:]

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